This week, we descend into the depths (dregs?), of the ills of upper echelon academia. Ah, my friends, the well is deep. Shall we deem it bottomless? It would often seem so.
The topic is, of course, timely, with the world’s attentions still fixed upon the sacrifices made by many thousands of tuition over-payers, across dozens of leafy campus settings, in eschewing their focus on secondary matters such as finals and graduation, to unite in outrage in protest of the “war crimes” committed by the lone representative democracy within 1,500 kilometers of the Mediterranean. Abandoning their luxury dorms, plush libraries and world class workout facilities, and ensconcing themselves in tents on the quad, they wile away the hours chanting sing song rhymes, which charmingly call for the elimination of the country in question.
In retrospect, this should surprise no one. It’s all part of a highly marketed, deeply branded experience, under which the privileged pay outrageous sums to send their progeny off for three objectives: 1) to get them laid; 2) to school them in the evils of their underwriting antecedents; and 3) to get them laid.
I will, however, strive to cut this rant short – not because I don’t have an endless source of fodder, but instead in to devote our limited space to our primary subject matter of financial risk management.
To wit, I read with interest that the Power 5 Conference Consortium (including, somehow, the Pac-12, whose membership roll, by my last accounting, had dwindled down to two forlorn universities) intends to convert their athletically gifted scholars into employees. The execution plan, was, inevitably, indecipherable, and is beyond the paygrade of this observer to articulate. Suffice to state that it involves back pay of ~$3B (with the lawyers grabbing their gargantuan but entirely earned share), and a payroll budget of $20M/year per alma mater.
This, of course, begs several questions. Like, how quickly will $20M morph into >$200M? How will the compensation be distributed? And how will all this impact recruiting?
All remains to be seen, but, meantime, there are certain realities we can discern, most important for our purposes, is that university sports departments are now deployers of capital, must operate their programs as portfolios, and as such, must now perform portfolio risk management.
Among the most vexing challenge will be to identify an appropriate Objective Function, which I anticipate will vary from institution to institution. The Domers, with their proud tradition dating back to Rockne and the backing of the Holy See, will almost certainly seek maximum returns, taking the form of gridiron glory – and irrespective, with The Lord on their Side – of associated risk. Other, secular institutions with perpetual eyes on the bottom line and little rational hope of athletic conquest (think University of Chicago) may wish to deploy their capital in more prudent, judicious fashion.
There may also be a crew with sufficient computing chops (think Cal Tech or MIT) to create low-cost arbitrages and thereby lap the completion.
Meantime, we can begin to identify the certain constraints. The initial allocation, as mentioned above, is $20M/year, so we can start there. Presumably, though not yet specified, the NCAA will enforce some diversification – by limiting max payouts to individual athletes and demanding large chunks be allocated to pain-in-the-ass Title IX programs such as Field Hockey.
From there, we can impute some emerging portfolio construction contours. A baller power forward or mauler offensive tackle may justifiably command a premium, but we should bear in mind that in terms of the latter, that two are required to operate an offense.
At any rate, one thing is certain: ‘tis out of elegantly engineered Objective Functions and Constraint identification that effective risk reporting doth emerge. But here’s where our true problems begin to materialize, for, how on earth are we to measure performance?
It’s easy enough to calculate the in-action results of a Jaydon Daniels or a Caitlan Clark, and, with a micro-dose of imagination, we can even impute the associated impacts on the competitive fortunes of their teams. Daniels won the Heisman, but got injured at the end of the season, and his Bayou Bengals finished 12th in the final AP Coaches Poll. Clark led her team all the way to the final game of the Big Sadie Hawkins Dance, enchanting the world throughout, but her Cyclones got bested by the Lady Gamecocks in the Championship Game.
More pertinent fort our purposes is the Sisyphean challenge of measuring financial impacts and attendant appropriate compensation.
For someone like Caitlan, and with a $20M aggregate cap, we can perhaps approximate the former. As of 2022, the Iowa State Endowment clocked in at just over $1B, or 2% of that of Harvard. My guess is that we’re looking at a double or more, simply in tribute to Ms. Clark. Incremental TV ratings and revenues were also a rocket ride.
So, let’s assume that this lady hoops machine negotiated, say, a $2M payout from Iowa State University – about the max, due to internal political constraints, which I can envision any single player receiving. My guess is that the return on this 2 Large is well into the nine figures, which would surpass that of even early-stage Uber. Or Alphabet.
But if we’re gonna do risk analysis here, we must find a way to incorporate such metrics as volatility, drawdown, and, of course, Factor Sensitivities. Good luck with that, but ultimately, the Board of Trustees is going to demand a Sharpe Ratio on your 5 Star QB or McDonald’s All-American point guard, and price him accordingly. The Mr. Hyde of my risk management persona is giddy at the notion.
Moreover, the challenge will broaden out when the $20M payout constraint is obliterated. If nothing else, the lawyers will successfully demand this, arguing that athletic powerhouse institutions garner hundreds of millions of dollars a year from the toiling of the vassals that represent them in intercollegiate competition, and that in the name fairness (along with, say, a 30% cut) this outrage must be eradicated.
At that point, effective risk analysis as a decision support tool will be rendered even more essential.
The good news here is that I have adapted my models to these first world challenges. However, I am not prepared to share them. But if the provost of the (new BIG Member) University of Oregon (selected here because their athletic program is generously underwritten by Nike Founder Phil Knight) is reading this, he or she should call me. Perhaps we can do a little biz.
Remember in future times that you read it here first: the perennial winners of future NCAA competitions will be those institutions that practice financial risk management with the greatest rigor.
The same can be said about old school portfolio management. You know, the kind involving the holding of positions in financial instruments? I encourage my readership to view this as good news, because simply by virtue of having paid close attention to this space, you have acquired a significant edge over the masses.
And my best advice for the moment is to continue to do what you do. For what it’s worth, I think it pays to stay long here, as, not only will you thus place your rooting interest on a powerful momentum force, but you will avail yourselves of the alarming excess liquidity that continues to slosh around the financial ecosystem. There’s not much doing, data-wise, between now and the end of the Quarter, but if you’re looking for catalysts, it may behoove you to consider the following catalysts. The Treasury Department, for the first time in a generation, is fixing, starting this Wednesday, to buy back some of its wonkiest, most illiquid securities, and their besties at the Fed will, starting next month, reduce their Balance Sheet taper – from $60B to a beggarly $25B per month.
All of which should act to render the rich holders of securities even richer. I think it’s a good bet – kinda like taking UConn in the most recent March Madness series. Or betting on the SEC champ to win it all in the FBS.
The former would’ve worked like clockwork a few weeks back. The latter? Not so much, as, for the first time in a decade, the honors of College Football devolved to my home conference, the BIG, now expanded to 18 teams – including Phil Knight’s Oregon Ducks.
The reigning champs, though it pains me to write this, are the Michigan Wolverines, who I dislike out of pure jealousy. I’d like to call this a one-off, but I fear they will retain an advantage under the new paid paradigm.
Among other matters, their subterranean football stadium – The Big House – accommodates 115,000 ticket buyers, which is a great deal of working capital to redeploy in the payment of their athletic squads. Their alumni rolls also include a host of annoying Wall Street types, who, while many not among my favorite people, are at minimum, capable of calculating Sharpe Ratios and Factor Sensitivities.
As such, and one way or another, though, I am forced to cry uncle and enter the new world with an unenthusiastic “Go Blue”. Like so much else in our evolving world, my heart is not in this. But my choices are depressingly limited, so I preserve and suggest you do the same.
TIMSHEL