Archives for January 2018


What prompts racehorse owners to put up $1 million to enter their charges in the Pegasus World Cup Invitational?  The apparent answer is a huge payout if their horse wins and a big check for second or third place.  But that is an incomplete explanation for the motivation since some of the entries have little chance.

Horse racing draws owners from a wide assortment of backgrounds.  An oft-seen trait among them is an apparent affinity for risk-taking across life’s endeavors, as personified by legendary historical characters like Edward Bradley, James Keene, and John Madden.

Racehorse owners whose fortunes were made in not-for-the-faint-of-heart business and financial ventures are still plentiful.  To illustrate, Seth Klarman of Klaravich Stable–who grew up blocks from Pimlico racetrack–is the chief executive officer of Baupost Group, which is one of the largest global hedge funds.  His tolerance for problematic outcomes is demonstrated by Baupost’s ownership in late 2017 of nearly $1 billion in highly hazardous debt issued by Puerto Rico.

Another example:  Vincent Viola, part owner of 2017 Kentucky Derby winner Always Dreaming, accumulated a substantial part of his billion dollar-plus net worth by betting on oil prices at the New York Mercantile Exchange.  Even West Point graduate Viola’s initial occupation, U. S. Army soldier, is perilous.

Such narratives are common around the globe.  Irish businessman J. P. McManus, who owns the largest stable of National Hunt horses, made a substantial part of his considerable wealth via currency trading.  The Guardian wrote “McManus doesn’t bet in thousands; he bets in hundreds of thousands.”

Similarly, prominent Wall Street notables like to play poker for big pots in their spare time.  Business Insider once published an article titled “The 22 Biggest Poker Players on Wall Street.”

In January 2018, instead of a hedge-fund titan turning to horse racing or poker, the reverse occurred.  That is, a high-stakes gambler crossed over to the world of high-stakes investing.  Bloomberg reported: “The World’s Best Female Poker Player Joins the World’s Biggest Hedge Fund.”  The reference is to 33-year-old Vanessa Selbst, who took a full-time position with Bridgewater Associates.  Her bio reads:

“Vanessa Selbst is a professional poker player and the highest earning female poker player of all time, with over $11.6 million in total winnings.  She is a member of Team Pokerstars Pro, where she plays under the username ‘V. Selbst.’  A native of Brooklyn, New York, Vanessa has been playing poker for over 10 years, starting out in online and live NLHE and PLO cash games.  In 2007, Vanessa hopped onto the live tournament scene and never looked back (apart from that two-year hiatus she took to go to [Yale] law school)!”

Selbst says that successful gamblers and exceptional investors have “so many similarities,” such as patience, strategic flexibility, and aggressiveness when “you [think you] have the best hand.”  She compared her work at Bridgewater with poker playing:  Like gambling, investing is “also really freaking difficult.”

Horse racing and other skill-combined-with-chance plays have always been compelling to driven individuals who have made their marks by starting businesses or trading and investing on financial exchanges.  Risk in the pursuit of great rewards is a powerful allure.  That verity will be on display Saturday in the Pegasus World Cup Invitational.

Copyright © 2018 Horse Racing Business


Frank Stronach is an octogenarian but that fact has not diminished the entrepreneurial aptitude he demonstrated as a young man, when he went from being a poor Austrian immigrant in Canada to founding and building Magna International, a giant auto-parts manufacturer and supplier.  Much later in life, he conceived and brought to fruition the world’s richest horse race, the $16 million Pegasus World Cup Invitational.

The second annual running is at Gulfstream Park near Miami, Florida on Saturday, January 27, 2018.  Basically, Gulfstream sells twelve slots in the race, valued at $1 million each, to shareholders, who have several options.  They can start a horse they own or lease or sell their slot to another owner.  The $12 million purse money has been supplemented by The Stronach Group, bringing the total purse to $16 million (the purse in the inaugural year of 2017 was $12 million).

In conjunction with the Pegasus World Cup, Gulfstream is holding a high-stakes handicapping contest.  The buy-in is $12,000 to be bet on Friday and Saturday, with the Pegasus World Cup being a mandatory race to play.  In addition to Gulfstream, satellite facilities owned by Frank Stronach will allow bettors to participate for an extra fee of $1,000 that goes into the betting pool:  Golden Gate, Laurel Park, and Santa Anita.  Stronach Group-owned is another way bettors can join the competition.  The payout for first place in the contest is 50% of the pot (an estimated $250,000), with the second-place winner getting 14%, third place 10%, and so on.

The Pegasus World Cup instills some excitement into the racing calendar early in the year, preceding the beginning of fan interest in the major prep races for the Triple Crown.  Moreover, owners now have plenty of monetary incentive to keep top-flight horses running after the Breeders’ Cup–at least for one more race–before retiring them to stud.

Mr. Stronach’s creation has not only stirred interest among race fans, but it has given them a respite from winter as they await the annual focus on the Triple Crown races, with the promise of longer and warmer days.

Copyright © 2018 Horse Racing Business


The bloodstock market is multifaceted, with bloodstock sales encompassing, for example, weanlings, yearlings, broodmares, 2-year-olds in training, and horses of racing age.  The market is also divided into private sales versus auction sales.  The most closely watched indicator of the overall economic health of the bloodstock market is the average price for yearlings sold at auction…and that is the focus here.

My research found that there is a weak positive correlation between several macroeconomic variables and the level of auction prices for yearlings:

  • U. S. consumer sentiment about the state of the economy.
  • Gross Domestic product.
  • U. S. real personal income.

As for economic characteristics that pertain specifically to the Thoroughbred industry, there is also a weak positive correlation between average auction price for yearlings in a given year and…

  • the direction (as measured by year-over-year percentage change) of the previous year’s foal crop.

Average yearling auction prices are barely or not at all related to the level of:

  • Pari-Mutuel Handle.
  • Aggregate Purses.
  • Annual returns of the S & P 500.

Thus auction yearling prices are divorced from the two most important indicators of the economic well-being of the Thoroughbred industry at the retail level—pari-mutuel handle and aggregate purses.  This is like saying that the price of gasoline at the pump bears no relationship to the per-barrel price of oil.

Further, the wealth effect–as inferred from how the stock market is performing–has little or no demonstrable relevance to yearling auction prices.

This is not to say that the overall economy does not affect yearling auction prices because it does…but not normally to the extent that might be expected.  Under extreme conditions, of course, such as the world economic crisis of 2009, bloodstock prices plunge.  The bigger surprise is that stagnant pari-mutuel handle and purses appear not to faze major yearling buyers.

A disconnect between yearling prices and economic outcomes demonstrates that horse racing is much, much more about sport than it is about business, similar to other equine competitions.  For instance, in the world of show jumping, prices are paid for horses that in several lifetimes could not be earned back via winnings.  To use stock-market parlance, the price-to-earnings ratio is often incalcuable.

Some auction buyers are so wealthy that neither economic considerations nor the state of the retail pari-mutuel industry is a deterrent.  Other less wealthy buyers, and especially partnerships that spread risk, are willing to take a shot at striking it rich and/or finding a diamond in the rough; John Henry, Seattle Slew, and other bargains are their inspiration.

The economies of the developed nations should be strong in 2018 and that will provide a tailwind for bloodstock markets.  But the average auction price for yearlings this year—and any year–depends mostly on the propensity (i.e., the animal spirits) of a few deep-pocketed buyers who are able and willing to bid up the prices for a small percentage of coveted horses…and thereby raise the average price.

Copyright © 2018 Horse Racing Business