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Picking Winners

How to Play March Madness Like a Fixed-Income Trader

Doug McDermott of the Creighton Bluejays shoots against the Providence Friars' Josh Fortune during a game of the 2014 Men's Big East Basketball Tournament on March 15

Photograph by Jim McIsaac/Getty Images

Doug McDermott of the Creighton Bluejays shoots against the Providence Friars' Josh Fortune during a game of the 2014 Men's Big East Basketball Tournament on March 15

If you think picking the winners in a 64-team bracket is hard enough, consider the difficulty in guessing who will score the most points in all those games. That’s exactly what Steve Kuhn wants you to do. The partner at Pine River Capital challenges friends and colleagues to pick the players that will score the most points throughout the NCAA men’s basketball tournament. His player portfolio challenge allows each contestant to choose 20 players, with the winner earning money for charity.

Steve KuhnPhotograph by Scott Eells/BloombergSteve KuhnKuhn, the co-head of fixed income trading, has always been a fan of combining sports and quant analysis and considers his trading day job quite similar to the baseball decision-making described in Moneyball. Billy Beane, the Oakland As executive at the center of the book, looks for undervalued players; Kuhn looks for undervalued trading opportunities, he says, “thinking of quant ways to be smarter than the market.”

The undervalued opportunities in Kuhn’s NCAA pool—individual players—take on the flavor of “derivative” or “tranche” investments that have become such a part of modern financial trading. Maybe you don’t like a certain team, but you really do like one of the players—now you can select that individual for your portfolio.

A winning strategy needs to combine players who can score points and survive many games into the tournament. Finding this balance is what’s tough. Do you focus on the best teams and load your portfolio with many players from them? Or do you pick the absolute best scorers and hope their teams can win a bit? Kuhn says you “need to be a little bit of a quant nerd” to appreciate this challenge.

Because it’s winner take all, Kuhn emphasizes the importance of taking some risk in your selections. “You need to pick a couple [of] unusual players.” One example is Creighton’s star scorer, Doug McDermott. He’s the fifth-leading scorer in the history of Division 1 basketball, and he averaged 27 points per game this year—but how many games do you think Creighton is going to last into the tournament?

Playing under Kuhn’s system also changes the way the tournament is watched. You will be rooting specifically for players you own to shoot, rather than pass, and how the game develops is more important than the outcome. Even a blowout victory could be dangerous if your star player ends up resting on the bench.

Chemi is head of research for Businessweek and Bloomberg TV.

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