The Football Educator’s guest blogger Richard Hill introduces us to the concept of Sportfolio Management: Hedging.
The Business of hedging
Those familiar with finance will understanding the term “hedging” in the business sense, while others might know the phrase “to hedge a bet.” A hedge is, essentially, a backstop in case of failure.
For example, in finance, one might purchase a stock in a company with the hopes that the price will increase. However, in order to “hedge the risk”, that person might also buy protection in the shape of an option to sell the stock at a set price. An option grants the purchaser the “option” of using it, which, in this scenario, could protect this imaginary investor should the price of the stock fall.
Hedges in NFL Contracts
There are examples of hedges all over the league. One of the more obvious examples would be in contracts that the players sign. Teams sometimes create contracts that grant themselves the option of extending the players contract for a year- a hedge that protects the team in case the player either doesn’t play well (the team doesn’t pick up the option) or if the player exceeds expectations (the team picks up the option for below market value).
Other hedges in contracts can range from on-field production escalators (teams will pay more for better production, but don’t have to pay if the player doesn’t meet his goals) to the amount of playing time. In fact, you might have heard about these escalators when teams trade players for draft picks and one of the picks is “conditional.” This is the team hedging on the trade- if the player does well, the team will pay a greater draft pick, but if he doesn’t the floor price is set and the team is protected.
Hedges in the NFL Draft
Keep an eye out for hedges in contracts and trades- but also look for hedges in the draft itself. As you might have heard, the Patriots struck gold in 2010 when they drafted tight ends Rob Gronkowski in the second round and Aaron Hernandez in the fourth. New England had also double dipped in the draft when they selected Shane Vereen and Stevan Ridley in 2011. While the Vereen/Ridley duo is far less successful, you can see that the lack of production by the second round pick Vereen has been more-than offset by third round pick Ridley- which means the Patriots have successfully hedged their position while drafting running backs.
In this past draft, a lot of people questioned the Redskins when they drafted Robert Griffin III with the second overall pick and also took Kirk Cousins with their next pick in the fourth round. Well, that pick has definitely paid off . The Redskins knew the risks of drafting a smaller mobile quarterback and hedged the risks associated with that style of play by taking another quarterback in the draft. There are risks associated with all players, whether it’s due to style of play or past injuries; the Redskins are just another example of teams hedging their position.
Looking to the future, keep in mind that a hedge is by no means a vote of lack of confidence. When a team double dips in this upcoming draft, understand that not only does the team like both players- but that the players are both taken in order to protect the team.