You know that hedge funds have met their ultimate test when they take a wager against the world's richest man, one whose fortune has been built upon investment strategy.

You know that hedge funds have met their ultimate test when they take a wager against the world's richest man, one whose fortune has been built upon investment strategy. So when a fund of hedge funds manager enters into a bet for an amount expected to be about USD1m with Warren Buffett, he had better be confident about the result.

What is the bet? It is whether or not funds handpicked by experts can beat the S&P 500 index over 10 years. The issue is whether investors' returns from hedge funds can beat a passive index strategy over the long term despite the hefty fees levied by their managers.

Many managers, including New York-based fund of hedge funds manager Protégé Partners, which has taken up Buffett's challenge, believe that good hedge fund managers are worth their fees because they can deliver positive returns in all kinds of markets.

There is some USD640,000 in the kitty, half put up by Buffett and half by Protégé Partners. At the end of 10 years the pool, expected by then to be worth around USD1m, will go to a charity of the winner's choice. The bet has underway since the beginning of this year.

Protégé principal Ted Seides joked to Fortune magazine: 'Fortunately for us, we're betting against the S&P's performance, not Buffett's.' Time will tell who will win, but 10 years down the line, the result could be a telling public verdict on hedge funds and their performance.