Well, the season is over for Calgary Flames; so anything hockey-related should be a fair game here now.
I thought the article below titled
Pulling the Goalie: Hockey and Investment Implications could generate an entertaining and interesting discussion.
Preamble:
For those who do not know anything about hedge funds, just a very brief (and overly simplistic) background: a
hedge fund is a private investment vehicle that is intended to make rich people more rich. Hedge funds invest their wealthy clients money by trying to recognize market trends and betting for and against various securities. Some obvious examples: they actively buy both long stocks (that they think would go up) and short stocks (that they think will go down). They also buy and short a vast amounts of options on bonds, currency contracts, derivatives and other financial instruments on the same principle. Modern hedge funds are managed mostly by very high-end technical people using super-complicated mathematical models recognizing market rends and sending buy/sell signals etc. Even though there have been some spectacular hedge fund failures (LTCM etc.) and even though there are hundreds of copycat funds that do not do so well, the most successful hedge funds (e.g. Medallion, Tiger) have proven that they can consistently outperform the general market and make more money (in exchange for huge fees 20%+++).
Cliff Asness is one of today's most respected hedge fund directors. He had sent this letter in the link below to the investors in March.
Summary:
In drawing parallels between professional hockey and investment management, Asness and his team have analyzed the probabilities of success and failure in NHL arising from pulling a goalie when down 1, 2, 3, 4 and 5 goals. The results are quite stunning. I found the following conclusions to be the most striking:
1. All NHL coaches do not pull goalie when a goalie SHOULD be pulled for maximum probability of success.
2. All NHL coaches are groomed to prefer losing while making proven decisions than winning while making unproven decision.
If you do not care much about reading the math and stats stuff, jump to the Chart on Page 5.
Discussion:
On the second point, I find myself totally agreeing with the theory behind coaching to lose. It does make a lot of sense to me and I see many parallels to this same approach in both large private businesses and government organizations.
On the first point, I find it very hard to agree to the theory behind pulling goalies earlier. Remember, these are extremely intelligent people behind these calculations and there are no reasons to believe that their probability estimates are incorrect. After all, all of their calculations are not theoretical - they are based on the actual NHL production numbers - all of the numbers, in fact. I do think there is something shaky and missing though. It could be that the players would take more shots on empty net resulting in more goals. But they have not so far in the time they have...
Anyway, here is the
link. The letter is not very long. Enjoy!