Hedge Your Bets at the Track

Tomorrow is the second race in the famous Triple Crown and as the winner of The Kentucky Derby; Big Brown is a favorite to win the Preakness Stakes. Whether Big Brown wins the race and goes on to win the Triple Crown -which would be the first time in 30 years-I am sure some in the racing world are wondering what will happen to the horse racing business after this year.  The reason being-Big Brown is owned by a new type of horse owner-a Hedge Fund.

My guess would be International Equine Acquisitions Holdings, will report a strong return to their investors especially if Big Brown goes on to win the Triple Crown.  Although even with just the Derby win under his belt I guess his stud fee will help this firm’s performance for many years. 

I think a bigger more interesting question should be asked: Will the success of this strategy and its uncorrelated returns to any traditional financial market lead to other copy cat funds being formed?  If I was a betting man I would bet big on the answer being yes.  And if this occurs then is the horse racing business in for an explosion to the upside on cost as we have seen happen in the commodities universe specifically with oil and natural gas?

Will Hedge Funds and their large pools of money start attending these horse auctions with the hope of walking out with the next Big Brown? If Hedge Funds do start to attend these auctions then you can expect the prices at these auctions to break new records and for many more horses to be bought, for the funds will most likely try to spread their risk out over numerous horses. 

These new record breaking prices will most likely trickle down into others cost and revenue producing areas of horse racing such as stud fees, sponsorships and race winnings.  As the race purses, sponsorships and stud fees increase in value more investors will try to get into the strategy and I would presume more people in the general public would be interested in watching the races both in person and on TV.

If the strategies are proven to work and the returns can be spread out over a long time period especially with stud fees and sponsorships then I would expect some institutional investors to invest in this strategy in the next 3 years or so, perhaps thru their emerging manager platforms.  Once this occurs people presently involved in horse racing may be in for a very pleasant surprise.

As you watch the Preakness Stakes tomorrow; I ask you to remember you may not only be watching a historical race in regards to the Triple Crown but you may be watching the horse, Big Brown who is responsible for changing the horse racing business for ever.   

 

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