Hedge It Like Beckham

Think you’ve heard of all asset classes? Timberland, airports, highways?  Yeah?  How about equity in football players?

Romek Pawlowciz’s firm Orthogonal Partners specializes in finding unusual and innovative hedge fund managers.  By introducing new forms of risk to capital markets, he completes markets by providing investors with very specific risk premiums that were hitherto embedded within larger more complex securities.  And this strategy certainly falls into the “unusual” category.

While professional football (a.k.a. soccer) teams can often raise money backed by their physical assets (e.g. a stadium) or can issue equity on the strength of their income stream, they can’t raise capital specifically dedicated to signing a new player.

Until now, that is.  Pawlowicz has been working with a hedge fund manager who specializes in providing capital to football teams in order to buy promising players at the beginning of their careers (17-23 years old).

Pawlowicz describes this as a time-arbitrage strategy since the player must be signed now but will provide the greatest payback at the peak of their career (typically at around 27 years of age).  In the meantime, the player can get injured or simply not live up to the hype and therefore never provide any benefits to the team. Worse yet, a great player might become a free agent and leave the team that built his career (and his value), thus leaving the third party investor with nothing. (Although new players funded by this external capital will have to sign an agreement allowing the investor to reap rewards even if/when the player becomes a free agent and leaves their original team.)

Sure, buying stock in publicly-traded professional sports teams does capture this risk premium – among many others.  But the specific risk and reward associated with one particular player cannot currently be disaggregated from other business risks such as television revenues or win-loss records.  And so Romek Pawlowicz’s football player fund exemplifies the new granularity delivered by alternative betas that is helping to complete capital markets.

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