Hedge fund guy here.

- You have to consider risk. Perhaps use volatility as a proxy. Were the funds more or less volatile than the S&P? There are funds that are more and funds that are less. The bet ought to be adjusted for that, ie some form of risk adjusted return.

- It's a rigged bet. A fund of 5 funds of funds is going to be the market, minus fees. Yes there are funds that aren't just long the market but quite a lot will be. Many managers find it a sensible bet to add some beta, because the market often goes up and you will often be judged vs the market, not absolute returns. Throw them all together in a pot and all the spice is gone. Now take out fees.

- Plenty of individual funds did beat the S&P (I'll toot my own horn here), but to beat the average someone's gotta be under average, typically other hedge funds.

- You have to wonder how the bet would have fared had we not experienced the unprecedented reaction of central banks to the crisis. I don't know if Buffett had considered that, he's a smart guy, but it didn't seem like that was what the bet was about. If the market had been allowed to take a "more natural" course perhaps the funds would have looked better.

- You can find long periods in the past where the S&P was sideways. The constant advice to index is simplistic. Think about your own situation before you do that, there's at least a lot of interesting things to learn before you give up.

------Edit------

Seems to be a lot of response to this. Now I'm not saying it was particularly smart to bet against the market. In fact if you read closely you can see why. Which side of the bet would I have taken? Well, if I wasn't running a fund, I'd have taken Warren's side, for the same reason. As it happens you have very little credibility as a fund manager if you're not invested in your own fund, so I ended up backing myself. (Which is not quite the same as the bet.)

For your average guy, I don't think there's a smart way for you to pick a fund to beat the market. You have to spend time actually investigating each strategy. An example of a fund who I think will provide a risk-adjusted market beating return is a guy I met once. He knows a bunch of stuff in detail about the valuation of exchange traded funds, and has infrastructure (technical and legal) in place to exploit discrepancies. It's quite far away from what people normally talk about when they talk about "investment". Most managers do not do this; they will just give you a variant of "I'm good at guessing and I can handle risk".

Regarding central bank intervention, of course it's a manager's job to think about what might happen. I'm merely saying that most of them probably didn't see it coming, and that that is the major component of the underperformance. Consider that the HF marketing is basically "we'll think about the future for you". Now if what ends up happening is basically that you should buy everything and hold it, then why would you expect a guy who can predict turns to do any better than the market? Keep in mind you're paying fees for him to sell and buy as things go up and down. Note that several managers did in fact close down, not because of catastrophic losses, but because they got fed up with the game.