Posts Tagged ‘Horse Racing’

A New Hedge Fund Strategy Emerges – With Amazing Perks

Wednesday, June 18th, 2008

As has been discussed and hypothesized in this Blog for the last few weeks with the success of Big Brown (and yes I know he did finish last at Belmont) there has emerged a new Hedge Fund strategy based on the success of future race horses.  We have mentioned in the past, Big Brown’s owners International Equine Acquisitions Holdings have planned to start marketing a horse based Hedge Fund this coming fall with the hope of raising $100million. 

Just a week ago it was announced that another collection of Horse Racing Legends were in the final stages of creating a Hedge Fund based on the future earnings of race horses.  The team for this new fund includes Nick Zitto, D. Wayne Lucas and Bob Baffert; all successful professionals in the horse racing field.  The fund Thoroughbred Legends Racing Fund is looking to raise around $100 million as well and will focus on identifying high potential horses early in their life span.

As with a traditional fund the fee structure is believed to be 2% and 20%.  Although this fund will look to make investments in horses as early as possible, hoping to avoid high cost bidding wars at the auctions, their entrance into the space will still cause the prices paid for these horses to increase.  As these prices increase so will everything else about the horse racing business.

Since both funds hope to own numerous horses and hence spread their risk out over as many as a hundred horses, even less pedigreed horses will have to be added to their stables.  These long shots will be where the real alpha could be produced even if the horses do not make it to the Breeder’s cup. And more importantly, to assure the funds return positive numbers these horses will compete in races throughout the country and a more operational/business management component I believe will become a greater part of the horse racing industry.

As I discussed in earlier Blogs I believe these funds will probably be able to raise the AUM they desire for a few main reasons:

1. The strategy has no correlation to the more traditional investment benchmarks. 

2. The assets behind the strategy can be traded and sold off at any point of the investment.

3. Although the goal is for your horse to win, this is not necessary to make a return on your investment.

4. A winning horse can offer a profitable revenue stream for many years; hence enabling the fund to show a consistent non-correlated alpha producing return for many years.

5. What other investment allows you at the next Kentucky Derby to raise a Mint Julep in the owner’s box to your horse. And if your horse wins, allows you to celebrate down in The Winner’s Circle - no other hedge fund investment has those perks!