In 2007, Warren Buffett and Protégé Partners entered into a $1 million bet: Could hedge funds outperform index funds over a decade? Buffett said no, and now it looks like the billionaire investor was right.

His chosen index fund - the Vanguard 500 Index Fund Admiral Shares - climbed 66% from the start of the bet through the end of 2015, compared with a gain of 22% for a basket of hedge funds selected by asset manager Protégé Partners, including fees.

Fortune, which reports the annual results of the bet, hadn’t released as of Wednesday how the two sides compared in 2016. But the S&P 500 rose 12% last year including dividends, while all hedge funds as a group rose 5.5.

With the $1 million bet set to end 12/31/17, it would take a massive stock-market drop for Mr. Buffett to lose. An extended bull market and subpar performance by many hedge funds since the 2008 financial crisis have helped his case.

Proceeds will go to the winner’s chosen charity - Girls Inc. of Omaha, Nebraska, if Mr. Buffett wins; Absolute Return for Kids, if Protégé Partners wins.

The irony of the wager is that Mr. Buffett isn’t always a champion of passive investing. As Berkshire Hathaway Inc.’s chairman and chief executive, Mr. Buffett became one of the world’s richest people by investing in undervalued stocks and buying companies. In fact, the stakes of Mr. Buffett’s current bet are likely to exceed $1 million because they are invested in Berkshire shares, which have risen significantly since 2007.

The rising value of the purse shows that Mr. Buffett’s faith in passive investing doesn’t trump confidence in his own investing abilities, said Mohnish Pabrai, managing partner of Pabrai Investment Funds and a follower of Mr. Buffett.

HOW THE BET CAME TO PASS.    Ted Seides, a former Protégé Partners executive, proposed the contest in 2007 following Mr. Buffett’s repeated criticism of hedge funds, which typically charge management fees and then keep a cut of any investment gains. So-called funds of funds usually charge an additional layer of management fees. All of those fees, Mr. Buffett argued, were eating away at investors’ returns. Cheaper funds that cloned the market were a better choice, he said.

“I wholeheartedly agree with your contention that the aggregate returns to investors in hedge funds will get eaten alive by the high fees earned by managers,” Mr. Seides said in a letter to Mr. Buffett proposing the bet. A copy of the letter was included in a 2016 book Mr. Seides authored.

 

But “I am sufficiently comfortable that unusually well managed hedge fund portfolios are superior to market indexes over time.”

Mr. Seides chose 5 funds of hedge funds that focused on equities and long-term value investing. Protégé Partners hasn’t named the funds chosen for its side of the wager, but Mr. Buffett said at Berkshire’s 2016 annual meeting that they represent “maybe 100 or 200 hedge funds.”

When the bet launched, Protégé Partners told Fortune Magazine that it had a 85% chance of winning. Mr. Buffett gave himself a 60% chance. The ensuing decade was particularly unusual, encompassing the 2008 financial crisis, unprecedented activity from central banks around the world and negative interest rates in some countries.