The Baseball Fund

baseball fund

baseball fundI’m  a baseball fan. My wife will attest to the fact that I am completely and hopelessly addicted to fantasy baseball. She spends all summer aggravated by the fact that I will stay up late watching whatever west coast teams are playing at home on my iPad.

One of the reasons that I am so fascinated with baseball is that there are an incredible amount of stats to break down. For most of my life I was excited by the basic stats like average, slugging percentage, and runs batted in. It’s obvious based on my trading style that I’m a numbers guy, and baseball plays right into that. 

Then, a few years ago (it’s more than a few years, but I have trouble grasping the fact that I’m getting older) I read books like Moneyball and Baseball Between the Numbers that introduced me to sabermetric thinking. If you haven’t read either of those books, they are a fascinating look at how someone can introduce a new way of looking at something that has been around for years.

Since then, I have used many of the sabermetric concepts to improve both my fantasy teams and my overall enjoyment in watching baseball.

Trading Bases

At some point last year, I was listening to something (honestly can’t remember) that prompted me to order a book called Trading Bases by a guy named Joe Peta. Since that book arrived, I haven’t had much free time to read it. I kept pushing it back on the reading list because I honestly didn’t remember why I ordered it. The book spent the last six months in the trunk of my car.

Since I knew I was going to have plenty of free time to read while sitting on the beach in Jamaica last week, I made a last minute decision to grab “that baseball book” out of my drunk as I was packing. I started reading the first chapter on a 5:15 am flight to Charlotte, and by the time our connecting flight landed in Montego Bay I was more than halfway through and couldn’t put down this fascinating book.

In the book, Peta describes his hedge fund background and how he translated that to creating an investment strategy that used sabermetric analysis to bet on baseball games. This concept combines two of my most passionate interests, so I would be thrilled to do this type of work for fun. However, Peta actually produce a return of more than 41% during the 2011 season.

How Did He Do It?

In the book, Peta explains his entire strategy in great detail. The short version is that he put together projected win totals for each team using their projected runs scored and runs allowed. Then, he adjusted each team for lineup changes every day based on each player’s PECOTA projections for the year.

He placed bets in situations where his model identified a discrepancy with the outcome that the sportsbooks were projecting. His bet sizes were based on the magnitude of that discrepancy.

One of the most striking things that I took away from the book is that the returns of Peta’s baseball fund were completely uncorrelated to the stock market or real estate prices. They really aren’t correlated to anything, which would make his fund a very attractive investment opportunity.

Could I Replicate His Results?

After reading Peta’s book from cover to cover in about 24 hours, I was left with a bit of an obsession. If I am already using most of the sophisticated statistical analysis that he used in monitoring my fantasy baseball team on a daily basis, could I replicate his results myself?

I took first place in my local fantasy league last year, which returned $700 on a $100 investment. I spent a few hours a week analyzing lineups, a few more hours a week listening to podcasts, and a few more hours a week watching games. While the return on investment was solid, it isn’t scaleable. This made me think that I might be better off ditching fantasy baseball altogether and building out a model similar to what Peta discusses.

With something like six weeks to go before Opening Day 2014, I am going to start putting together a strategy to trade baseball over the course of the season. I will keep a spreadsheet of the results this year, and if things go well I will put up real cash next year. If things don’t go well, I still think this will be a worthwhile venture documenting an attempt at an alternative investment strategy. Plus I’m going to watch the games and look at PECOTA projections anyways.