Billionaire investor and Berkshire Hathaway CEO Warren Buffett is a long time critic of high investment fees. Now he's laid down the equivalent of the Pepsi challenge to the hedge fund industry.

According to Fortune Magazine's Carol Loomis, Buffett has engaged in a $640,000 wager with New York City-based Protégé Partners, which runs a fund of hedge funds. The bet, says Loomis, a longtime confident of Buffett, is that the collection of hedge funds cannot return more to investors over the next ten years than the S&P 500 will.

The deal, struck on January 1, includes five funds of hedge funds selected by Protégé and based upon the average returns each delivers, net of all fees, costs and expenses. Buffett chose to bet on a "low-cost" S&P 500 index fund from Vanguard. According to Loomis, with each side putting up $320,000, a zero-coupon Treasury bond in the amount of $640,000 was purchased; at the bet's conclusion it will be worth $1 million and will go to charity.

The bet reflects an ongoing debate in the field.

Last year Harry Kat, a Dutch Economist, with the help of a graduate student named Helder Palaro, unveiled a computer program called FundCreator. The software designs strategies with the same risk-return properties as hedge funds, only without the fees associated with investing in one.

Kat, a former head of the equity-derivatives desk at Bank of America, claims investors can generate the same returns, without the so-called "two and twenty" or "three and thirty" cutting into the results. (Typically hedge fund managers charge a fee equal to two percent of the amount invested and 20% of any profits; fund-of-fund managers tend to tack onto that a management fee of 1% and a 10% commission on investment gains.)

Kat, like Buffett contends that hedge funds fees are onerous and should be avoided.

But others don't think this represents the full picture of how they operate.

"I hate to disagree with Warren, but I'm putting my money on Protégé," says one New York-based hedge fund administrator of the $640,000 wager. "There is lot more to hedge funds than high fees."

If he wins, Buffett selected the Girls Inc. as his charity and Protégé selected Absolute Return for Kids.