Is Berkshire Hathway a Hedge Fund?

I was listening to Dylan Ratigan's Fast Money TV show in my car this evening and was interested by the panel discussing the fact that Warren Buffett sold half of his position in JNJ. A memorable comment was "Maybe Warren's finally become a trader?"

I recalled that there was much discussion several months ago around the fact that Berkshire Hathaway had sold $40 billion in at the money index puts, receiving $5 billion in premium income. Of course, these puts were now heavily in the money, leaving Berkshire with a substantial liability on it's books.

This is an odd strategy for one who called derivative securities "weapons of financial mass destruction." Selling index puts is a hedge fund/investment bank strategy, not that of a long term value investor.

So this brings us to the question: is Berkshire Hathaway a hedge fund?

We can answer this question, as far as the equity investor is concerned, as before by comparing the monthly returns of Berkshire Hathaway to the returns accruing to dynamic trading. For this regression we have a strong prior, which differs to that for pure play investment banks such as Morgan Stanley or Goldman Sachs. We expect a significant positive alpha and zero beta, indicating that Berkshire makes money in a way entirely independant of trading risk premia.

The charts above show the Value Added Monthly Index for both Berkshire and the dynamic trading risk factor and a longitudenal regression of the monthly returns. This is for the entire dataset, from 2001 to date.

The regression shows that, over almost the entire previous decade, the monthly returns of Berkshire Hathaway common stock have a beta of 0.70±0.24 onto the dynamic trading risk factor, with a significance level (p-Value) of 0.005. The alpha is positive, but not significant, at 0.10±0.46.

Again we can break down the analysis into the pro articulum and per articulum parts; and, from this division, we see that this result is not driven by the current financial crisis.

As a final note, the appearance of the scatter plot suggests that a larger beta might be a more suitable estimate, which could be established with a robust regression procedure.