Play Fantasy Soccer? You Are Running A Fantasy Hedge Fund.

How many points did your team produce this week? Did you pick the right captain? Is it time to transfer that expensive, misfiring striker? If you play Fantasy Soccer you have probably asked yourself similar questions, but what you may not know is that managing a Fantasy team and managing an investment portfolio have more in common than you might think. At least they should be if you plan to win.

Fantasy Soccer?

A Fantasy Soccer player (a ‘manager’) assembles a squad of players with the goal of earning points from their performances in league games. Managers are given a set transfer budget at the beginning of the season with which to build a 15-player squad. The price of players fluctuates based on demand and player trading is an option throughout the season.

Each week managers must choose an 11-player team from their 15-player squad as their active point-earning players. Players outside the 11-player team do not earn points for the manager. Players are awarded or deducted points based on individual actions in their respective matches. As an example, suppose that in this week’s Chelsea match Frank Lampard scores a goal, assists a goal, but also receives a yellow card. He would receive +5 points for scoring the goal, +3 points for assisting the goal and -1 points for the yellow card, making his weekly point yield +7 for any manager that selected him as an active player. Point awards and deductions vary based on the event (goals, assists, clean sheets, goals conceded etc) and the position of the player.   The sum of the 11 player point yields is the full team score for the week.

Managers are then ranked based on team performance, the higher the score the higher the rank. Statistics are provided about the average team performance, who the most chosen players are, etc.

So how is Fantasy Soccer like portfolio management?

Squad Selection

This is where you get to do your best imitation of Harry Redknapp. Squad selection is the first major decision a manager is faced with upon starting a Fantasy team. Managers are required to buy a set number of keepers, defenders, midfields, and forwards but they are able to choose the particular players, and hence, the amount of money to spend in each category. In an investment portfolio the asset allocation process seeks to distribute capital between asset classes to balance the different risk and return profiles of each asset type. In the Fantasy world the assets just happen to be player types. Managers must decide which player type has the potential to produce more points for their price.  Defense? Midfield? Forwards? Where should more money be wagered on a high-priced player? The weighting of the four player types therefore should balance the potential point return from players versus the risk (volatility) of those returns.

Team Selection

If squad selection is asset allocation, then picking a weekly team is investment selection. A manager may only select players from the squad assembled earlier for each week’s team. Choosing the team to field requires the ability to recognize how the return of each player is affected by the new set of conditions presented each week. Some variables that factor into these decisions are player form, strength of defenders (for attackers), goal scoring likelihood (for defenders),  historical stats of the fixture and many more. As an example, if a defender is facing a strong team in good form (let’s say Manchester City) it is reasonable to expect that the defender will not be earning a clean sheet bonus for the week nor be able to get forward offensively, a manager then would be better served by selecting a defender from the squad with a higher chance of performing well.

In the portfolio world this is akin to a manager changing the sector allocations of the stock portion of a portfolio as trends or risk changes.

Absolute vs Relative Performance

At first look the winning strategy of Fantasy Soccer may look like simply scoring the most points possible. Build the team around the best players available, play them week in and out and hope for the best. But Fantasy is not really about racking up the biggest point total possible, it is about outscoring the other managers in the game. This is a subtle but large distinction. One objective may lead managers to chase world beating players and the another seeks outperformance but with controlled risk.

How to outperform the average dart-throwing-stockmonkey is a conundrum common to portfolio managers. There is even a term for it: Alpha.  At its most basic ‘alpha’ means the returns a portfolio has achieved in excess of the performance of a benchmark asset. For example, alpha could be the returns a manager earns over the performance of the S&P500 for the same time frame.

So why is this a big deal, especially in Fantasy?  Trying to outperform the average has large implications for investment/player selection because it forces managers to look for value in the market beyond the most well known buys. This is because it is difficult to outperform an average if you buy investments that are the average. Outperforming the S&P500 is going to be quite difficult if 95% of your portfolio is S&P500 stocks!

The same is true in Fantasy Soccer. If 95% of managers are fielding Wayne Rooney it does not matter how many points he scores for your team because 95% of teams get the same points. All teams stay on the same footing, therefore no outperformance is achieved. This does not mean that having Wayne Rooney (or other popular players) in your squad is a bad idea; they are big names for a reason after all, because  they are likely to score a lot of points. What it does mean though is that winning Fantasy is determined by outperformance on the ‘fringes’ of the squad i.e. by finding players who produce points despite being priced as low point producers.

Re-evaluation, Rebalancing, and Transfers

Active management of a portfolio requires constant vigilance and flexibility. Portfolios need to be readjusted to take advantage of changing market conditions. If municipal bond defaults are defaulting above historical rates it might be time to move away. Fantasy Squads need the same attention. If Robin Van Persie sustains a season ending injury he needs to be transferred and his value put to use on another striker. Or if a club is improving in form it maybe worth it to ‘overweight’ the squad with those players.

This activity requires a manager to decide when the cost of rebalancing is worth the potential gain of changing up squad allocation.  There are significant fees applied to player transfers and point deductions for excessive trading and transferring without a plan impacts performance very quickly. Commissions, taxes, and emotion based trading are as much a threat (probably more) to real portfolio performance.

I bet you didn’t realize that you are actually managing a fixed income hedge fund whenever you play Fantasy Soccer!

Play Fantasy Soccer? You Are Running A Fantasy Hedge Fund.

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