When the multibillionaire chief executive officer of Berkshire Hathaway, Warren Buffett, criticized hedge funds recently at his company’s annual meeting as a potential threat to the stability of the global markets, many of his followers and shareholders hung on every word. What many did not know, however, is that Mr. Buffett has invested $620 million of Berkshire Hathaway’s money in a hedge fund run by the son of a close family friend.

The $1.3 billion fund, Value Capital L.P., is run by Mark Byrne, son of Jack Byrne, the former president of Geico insurance. Geico has long been one of the Berkshire’s largest stock holdings, and the elder Mr. Byrne is a close friend of Mr. Buffett.

The fund is up 3% this year. It has outperformed the Hedgefund.net index of 138 similar funds, which is up 1.83%. Last year, Value Capital returned 6% versus an index average of 7.04%. The fund makes bets on the price movements of government bonds from 19 countries.

Like many hedge funds, Value Capital is based in Hamilton, Bermuda, where the regulatory and tax climate for hedge funds is alluring.

A call by The New York Sun yesterday to a Berkshire spokesman was not returned.

Mr. Buffett is widely known as “the Oracle of Omaha” for his remarkably good track record at his investment holding company, Berkshire Hathaway. Its Class A stock has returned an average of about 26% a year since 1965. The success of his so-called value investing style, in which he seeks to buy companies whose earnings or assets are undervalued, has earned Mr. Buffett legions of imitators and followers. It has also made him extraordinarily rich: With Berkshire’s Class A stock now selling for $84,950 per share, his 29% stake is worth $42 billion.

At Berkshire Hathaway’s annual meeting last week, Mr. Buffett, who traditionally uses part of his time on stage to discuss a variety of economic and financial issues that interest him, warned the thousands in attendance that within the $1 trillion hedge fund industry, “There are more people who go to bed at night with a hair trigger than ever before.”

He also said that hedge funds could resemble “an electronic herd” that might “stampede” if a single event panicked enough of them, sending stock prices sharply lower.

In that phenomenon, Mr. Buffett has had some experience, having bid for the investment portfolio of the Long Term Capital Management hedge fund after the Russian government declined to pay interest on its bonds, sending global bond and currency markets into a tailspin in 1998. His $250 million bid was ultimately rejected by the fund, and the New York Federal Reserve Bank organized a bailout led by Wall Street dealers.

The vice chairman of Berkshire Hathaway, Charles Munger – Mr. Buffett’s longtime investment partner – also sounded a note of caution on hedge funds.

“We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper,” Mr. Munger said. “A great civilization will bear a lot of abuse, but there are dangers in the current situation that threaten anyone who swings for the fences.”

Mr. Munger then veered off in an entirely new direction, comparing the state of capitalism to the biblical cities of Sodom and Gomorrah, which were destroyed.

Though the investment in Value Capital is disclosed in the footnotes of Berkshire’s annual report, Mr. Buffett rarely discusses it publicly, and when he does, he stays away from specifics. At the 2003 annual meeting, he described the reason for the investment in characteristically folksy terms: “We’ve made a lot of money with the Byrne family,” and “Mark is a very bright guy and runs a hedge fund specializing in fixed-income securities around the world.”

Mr. Byrne said neither he nor his other investors were disturbed by “Warren’s remarks,” as he put it, “because we understand that he has his opinions and he knows we have ours.” Moreover, Mr. Byrne felt that the remarks were generally misunderstood, being part of a broader discussion of stock market risks. He declined to offer his opinion on Messrs. Buffett’s and Munger’s characterizations.

The former head of fixed-income arbitrage trading at Credit Suisse First Boston, Mr. Byrne was blunt in assessing Mr. Buffett’s reason for investing with him. “Our families have been close since my father turned around Geico in the 1970s,” Mr. Byrne said. “He has a lot of loyalty and affection for my father and has known me for years.”

He described Mr. Buffett’s major concern before investing in the fund as being “whether I would have any of my money in it.” Mr. Buffett, whose investing prowess serves as a powerful marketing draw for the fund, according to rival fund managers, was given a favorable fee structure, according to Mr. Byrne, who declined to describe it. In return for charging it lower performance and management fees, Value Capital has the use of Berkshire’s money through 2007. Until 2004, when the fund was opened to other investors, the only investors in the fund were Berkshire, Mr. Byrne, and Mr. Byrne’s family.