Hedge funds lured to potential of football profits

HEDGE funds have invested in wine, whiskey and movies in pursuit of returns that outpace stocks and bonds.

Now they’re taking on an even riskier bet — the search for soccer’s next Wayne Rooney.

For £250,000 (€372,536), investors will have the chance to buy a piece of the next potential superstar. Hero Investments and Sports Asset Capital, two British-registered funds plan to buy stakes in the contracts of younger athletes, then grab a slice of the transfer fees clubs pay to obtain players.

The funds expect to profit from a buying spree led by Chelsea Football Club’s billionaire owner, Roman Abramovich, who has helped lift transfer spending by English clubs to a record £330 million (€491m) this year. By taking part-ownership of a player, they will also help smaller clubs compete for talent with larger rivals, the funds say.

Schmidt Research Partners firm founder Jacob Schmidt, said: “It’s fascinating, but you could easily burn your fingers. Investing isn’t about fun, it’s about hard work. While I’m not against fun, the risk is that people who are amateurs might get involved.”

Rich soccer teams often buy the rights to players for a one-time transfer fee that nets the selling club a profit. In 2001, Real Madrid paid a record $64.5m (€50.6m) to Italy’s Juventus for the contract of French midfielder Zinedine Zidane.

Manchester United paid as much as £27m (€40m) pounds to buy Rooney from Everton in 2004. Rooney, a 21-year-old striker, scored 36 goals in his first two seasons with the club. He also played for England in this year’s World Cup tournament in Germany, appearing just six weeks after breaking a small bone in his right foot during a regular season match.

Hedge fund assets have more than doubled in the past five years to $1.2 trillion (€942bn) as investors seek returns that outpace stocks and bonds. The funds, tailored to people with at least $1m to invest, are private pools of capital that let managers participate substantially in the gains on investments made on behalf of clients.

Nick Hely-Henderson, the 48-year-old founder of Hero Investments, says his fund will allow well-heeled soccer fans to profit while helping bring more competition to the sport.

“If we can help with the acquisition of players, we can help create a level playing field,” Hely-Henderson says.

Hero has raised £100m (€148m) to spend on contracts, Hely-Henderson says. The fund plans to invest for at least five years, and will probably acquire the rights to 20% to 50% of the transfer values for each player, he says.

Sports Asset Capital, set up by player-turned-financier Ray Ranson, 46, has £50m (€74m) to invest. Ranson, a defender who had a 14-year career at clubs such as Manchester City, says his fund will buy insurance to protect it against career-ending injuries as it strives to deliver a 20% annual return.

Hedge fund returns averaged 9% over the past two years, according to Chicago-based Hedge Fund Research.

British soccer has been a minefield for investors over the past 15 years. Singer & Friedlander Group wrapped up a fund that invested in soccer shares in 2002, five years after it began. The original investors lost 75% of their initial stakes.

Fans who buy shares in their favourite clubs haven’t fared much better. After Manchester United became the first to sell shares in 1991, more than 20 British teams followed suit.

Manchester United was bought out last year for 300 pence a share, 26% less than its peak in 2000. Ten teams have already returned to private ownership.

Like investors tied to a single share, the new hedge funds face an undiluted risk of losing money on players who never reach their potential or suffer career-threatening injuries.

Since Newcastle United paid £16m (€23m) for Michael Owen last year, the England striker has played just 11 times for his club and is now recovering from a knee operation.

Previous hedge fund investments in individual soccer clubs haven’t always been successful.

In Portugal, the FP Football Players Fund, which owns shares in Porto players, has risen 33% since it was created in 2004. Another, linked to Sporting Lisbon players, fell 25% in 2005, and one investing in Boavista has slipped 6% since 2003.

The British funds are betting that a flood of cash from broadcasting deals will prompt more transfers.

According to a report by accounting firm Deloitte & Touche, clubs throughout Europe may increase spending after England’s 20 Premier League clubs signed a contract with British Sky Broadcasting and Setanta Sports worth £1.7bn (2.5bn), a 67% increase over the previous deal.

Hedge funds may face resistance to their attempts to grab a portion of a star athlete’s transfer value.

“It could be dangerous — you could lose control over your assets,” says Jason Rockett, chief executive officer of Premiership team Sheffield United.

The prospect of creating a superstar is exactly what attracts some investors.

“It would be jolly nice to find 50 Wayne Rooneys, but that’s unlikely,” Hely-Henderson says. “Just as you don’t expect 80 winners in a traditional portfolio, we don’t expect 80 stars.”