Warren Buffett tapped a little-known hedge fund manager as the leading candidate to succeed him as the chief investment officer of Berkshire Hathaway Inc. when the legendary stock picker eventually steps down.

Berkshire named Todd Combs, manager of a small hedge fund from Connecticut, to oversee a portion of Berkshire’s roughly $100 billion investment portfolio. The surprise appointment will be a challenge for Mr. Combs, 39 years old, whose fund recently had only about $400 million in assets and primarily invested in the shares of financial-services companies.

The succession plan at Berkshire is among the most high-profile in modern American corporate history. Mr. Buffett, who turned 80 in August, has said he will likely split his job in two—into separate CEO and investing functions—and adds that he has no current plans to step down.

Mr. Combs is “not going to take over the whole investment function as long as I’m around,” Mr. Buffett said in an interview. “I have this dual position as CEO and CIO and I will remain in that.”

Berkshire has previously identified three candidates who could succeed Mr. Buffett in the CEO role. Though the company hasn’t named them officially, the front-runner is widely seen as David Sokol, a 53-year-old Omaha native who is chairman of Berkshire unit MidAmerican Energy Holdings and chief executive of NetJets, which sells fractional-ownerships of private jets to companies and individuals.

For now, Mr. Buffett says he will remain in his role as chief investment officer and that Mr. Combs will oversee a portfolio with a size he “feels comfortable with” and “scale up until he has a chance to get fully invested” over the next several months. Such a schedule would allow Mr. Combs to become invested without his returns and his pay—which will be tied to his performance versus that of the Standard & Poor’s 500 stock index—being brought down by holding large amounts of cash.

Mr. Combs will join a company that has fewer than two dozen employees in its corporate office, but owns over 70 businesses that collectively had more than 257,000 employees at the end of 2009. The businesses run the gamut from Geico insurance and See’s Candies to Dairy Queen and railroad operator Burlington Northern Santa Fe.

The surprise announcement came after two candidates—including Chinese-American hedge fund manager Li Lu, and another individual Mr. Buffett was interested in—took themselves out of the running for the job, Mr. Buffett said. The emergence of Mr. Li as a contender was the subject of a July page-one article in The Wall Street Journal.

“He is extremely well-trained, reads 500 pages a week and does his own deep-dive research,” said Chuck Davis, chief executive of Stone Point, who helped Mr. Combs start his own fund five years ago.

Mr. Buffett said Mr. Combs has been running in a horse race set up by Berkshire in 2005 to pick his eventual replacement. The billionaire investor described the announcement as a “significant step. If I die tonight the board has something in place.”

[via WSJ]