What fantasy football can teach fund managers

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The English football season ended on Sunday, and for 9.2million Fantasy Premier League players that means finding something else to ponder on a Saturday morning. In recent years, the fantasy version of the beautiful game has taken off. Every week, fantastic managers field a team of 11 players whose performance on the pitch converts into points in their game.

There’s a long tradition of gameplay among finance professionals, and fantasy football is no exception. Bond manager Bill Gross spent his formative years at the blackjack table. Warren Buffett plays bridge several hours a week, and poker remains a popular activity in the financial community.

As in finance, these games are characterized by incomplete information: players must assess the probability of outcomes in the face of uncertainty. As a result, they can hone transferable skills in financial markets. A recent academic paper showed that hedge fund managers who do well in poker tournaments show significantly better fund performance.

But what about fantasy football?

Unlike those other games, fantasy football takes place over a longer period of time – an entire season, from mid-August to the end of May. The fantasy managers choose a squad of 15 players with a fantasy budget of £100m ($126m), from which they choose their starting 11, and make one transfer a week in a market where player prices fluctuate depending on demand.

In effect, this is a portfolio building task. Over the course of a season, an active manager will make around 500 individual decisions with the aim of optimizing the portfolio. In addition to the initial selection and weekly swap, they also have to decide when to play various “tokens” that grant special powers – for example, a complete team overhaul. That’s fewer decisions than most investment managers would normally make, but enough to inject a healthy dose of judgment into the game.

As in portfolio construction, there are a variety of strategies that managers can employ. Momentum-based strategies follow the recent form of players. The “hot hand” in sport has been variously dismissed by scholars as a mistake, but the latest research gives it some credence. Some managers are looking for value, picking players who seem poorly valued relative to their performance. Others take a “moneyball” approach, using quantitative tools to identify players whose underlying stats signal an impending improvement in performance.

The best managers use all three approaches and block out market noise, according to a 2021 study by mathematicians from the University of Limerick. They concluded that “the main factors determining a manager’s success turn out to be long-range planning and consistently good decision-making in the face of the noisy contests on which this game is based”.

Whatever the strategy, a common feature with financial markets is the erosion of advantage, and the speed at which fantasy football has developed shows how this can play out. Ten years ago, the Fantasy Premier League was played by fewer than 2.8 million managers. Since then, participation has increased at the rate of 12.7% per year. At the same time, the amount of content available has increased significantly. Dedicated websites and podcasts have sprung up, and specialized Twitter accounts attract hundreds of thousands of followers. These resources have expanded access to information. A coach can no longer take advantage by knowing players’ absences due to injury or the starting line-up; now, this information is widely disseminated. Everyone is competing with the same information in hand.

One consequence is that the median fantasy manager improves. In any activity that combines a combination of luck and skill, as the variance of skill decreases, a proportionally greater part of the outcome becomes attributable to luck. Investment strategist Michael Mauboussin calls this “the skill paradox.” He identifies it in the field of active investment management, and it is also present in fantasy football.

This year’s Fantasy Premier League game was won by American Jamie Pigott, who scored more points than any winner in the last 20 years. Came a measly 39,319th. In past seasons, I’ve almost reached the top 1,000, but I fear the likelihood of that happening again is diminishing. With more managers competing, all with the same information, the game becomes more difficult. The impact of more active competition is evident in the performance of the managers chasing Jamie: the gap between his score and that of the 100,000th ranked manager was narrower than it has ever been, and he continues to shrink.

Jamie is not a professional money manager, but this season he has encountered many of the challenges faced by investment professionals. However, there is a difference: in the field of investing, the season never ends.

More from Bloomberg Opinion:

• $1 billion in Super Bowl betting reshapes the fandom: Timothy O’Brien

• What sports betting analysis teaches the markets: John Authers

• Hedge funds and the art of “false happiness”: Marc Rubinstein

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marc Rubinstein is a former hedge fund manager. He is the author of the weekly financial newsletter Net Interest.

More stories like this are available at bloomberg.com/opinion

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