Silver lining to a snoozer - INVESTMENT PERSPECTIVES - 361 Capital
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INVESTMENT PERSPECTIVES
Silver lining to a snoozer
Nearly halfway through the fourth quarter of the 2019 Super Bowl, the New England By Analytic Investors
Patriots and Los Angeles Rams were tied 3-3 in a game dominated by defense.
Then, Patriots quarterback Tom Brady connected one last time with tight end Rob
Gronkowsi on a 29-yard pass to the 2-yard line. Running back Sony Michel ran it in for a
touchdown on the next play, and approximately 98 million Americans watching on television
at home abruptly woke up. The Patriots went on to win 13-3 in the lowest-scoring Super
Bowl in history. On the bright side, the Analytic Investors team correctly predicted the
outcome—improving our overall record to a respectable 11-5 (69%) against the spread.
Thanks to a controversial non-call of an obvious pass interference in last year’s NFC
championship game, the 2019 season began with yet another rule change. The NFL
Competition Committee approved the use of instant replay to review pass interference
calls/non-calls for one year only. However, it was not without controversy as a mere
24% (24 out of 101) of such challenges were reversed by the NFL’s instant replay
center in New York. In spite of this, and wide receiver Antonio Brown being released
by both the Oakland Raiders and Patriots in a matter of weeks back in September,
the NFL didn’t miss a beat.
The game remained as popular as ever. Its already-high television ratings increased,
thanks to star quarterbacks both young (Lamar Jackson and Patrick Mahomes) and
old (Drew Brees and Aaron Rodgers). The Cleveland Browns attempted to build on last
year’s resurgence by trading for star wide receiver Odell Beckham Jr. but managed to
underachieve in their typical fashion. The Oakland Raiders made one final run at the playoffs
for their faithful in the Bay Area, but they ultimately fell short and packed their bags for
their shiny new digs in Las Vegas. CBS commentator Tony Romo continued to show an
uncanny ability to predict upcoming plays, earning him and/or his crystal ball a reportedly
record-setting contract offer from ESPN. Finally, the surprising Tennessee Titans upset
the defending champion Patriots in the wild card round of the playoffs, and football fans
outside of New England rejoiced.
January 2020The NFL’s centennial season concludes in Miami on Table 1. Alphas for all 32 NFL teams
Sunday, February 2, 2020, when the San Francisco 49ers
Alpha 2019 season
face the Kansas City Chiefs in Super Bowl LIV. 2019 2018 Alpha Favorite/
This matchup features two historically successful Team season season change Record underdog
franchises that haven’t hoisted the Lombardi Trophy in Miami Dolphins 70.3% 7.6% 62.7% 5-11 0-16
25 and 50 years, respectively. While football fans in New Orleans Saints 43.7% 32.9% 10.8% 13-3 11-5
general are happy to see an AFC team other than the Atlanta Falcons 39.4% -27.0% 66.4% 7-9 5-11
Patriots appearing in this game, it may actually also be a Baltimore Ravens 39.3% 8.5% 30.8% 14-2 12-4
good sign for our prediction. More on that later. Green Bay Packers 38.7% -40.8% 79.5% 13-3 12-4
San Francisco 49ers 37.8% -44.7% 82.5% 13-3 11-5
Alpha explained Seattle Seahawks 29.4% 12.8% 16.6% 11-5 11-5
Houston Texans 24.5% 15.2% 9.3% 10-6 7-9
At the core of this annual paper is a computation we Kansas City Chiefs 24.1% 18.0% 6.1% 12-4 13-3
developed way back when Tom Brady and Bill Belichick Buffalo Bills 19.1% 48.8% -29.7% 10-6 7-9
only had one Super Bowl ring to their names. We think Tennessee Titans 17.5% 36.9% -19.4% 9-7 10-6
of it as the merging of football and our quantitative Oakland Raiders 11.3% -26.4% 37.7% 7-9 4-12
Denver Broncos 6.0% -21.4% 27.4% 7-9 5-11
approach to investment management, called “NFL alpha.”
New York Jets 4.2% -35.9% 40.1% 7-9 5-11
This version of alpha is the cumulative return on
Tampa Bay Buccaneers 3.6% -16.4% 20.0% 7-9 7-9
investment (ROI) for all 32 NFL teams’ performances
Indianapolis Colts -0.1% 14.6% -14.7% 7-9 8-8
relative to wagering market expectations for all regular
Pittsburgh Steelers -0.3% 8.0% -8.3% 8-8 9-7
season games. Minnesota Vikings -1.9% -13.0% 11.1% 10-6 11-5
New England Patriots -3.7% -5.5% 1.8% 12-4 16-0
To illustrate, let’s assume a $100 “money line” wager
Philadelphia Eagles -4.5% 27.9% -32.5% 9-7 9-7
on the Green Bay Packers to win before each of their
Arizona Cardinals -6.6% -25.9% 19.2% 5-10-1 1-15
16 games. If the Packers win in a given week, one would
Los Angeles Rams -9.5% 9.7% -19.2% 9-7 13-3
collect the $100 wager plus an additional amount that’s Jacksonville Jaguars -11.7% -34.8% 23.1% 6-10 4-12
a function of their win probability, as implied by the Chicago Bears -15.7% 30.1% -45.8% 8-8 11-5
wagering odds that week. Should they lose, one would Dallas Cowboys -26.9% 46.8% -73.7% 8-8 14-2
lose the $100. Once the season concludes, we then add up Cleveland Browns -31.5% 0.5% -32.0% 6-10 11-5
the winnings and compare that number with the $1,600 Carolina Panthers -35.0% -4.6% -30.4% 5-11 6-10
total amount wagered during the season ($100 per game Los Angeles Chargers -40.5% 24.6% -65.1% 5-11 10-6
for 16 games). Any amount above $1,600 would imply Washington Redskins -41.8% 6.5% -48.3% 3-13 2-14
a positive NFL alpha, and anything less would indicate a New York Giants -49.3% -27.3% -22.0% 4-12 5-11
negative one. In this case, one would have tallied just over Detroit Lions -54.7% -6.0% -48.7% 3-12-1 3-13
$2,218 due to the Packers alpha of 38.7%—fifth-best in Cincinnati Bengals -69.6% -29.0% -40.6% 2-14 3-13
the NFL and a whopping 79.4% improvement over 2018 Source: Analytic Investors
(see Table 1 on right). Could this be attributed to the
Packers’ new head coach, Matt LaFleur? We’ll leave that to
the sports analytics community to debate.
The Dolphins traded away a number of star players at the
Can one game affect alpha? beginning of the season in hopes of ending up with the #1
pick in next year’s draft. Some experts coined this strategy
The process of writing this paper begins with an annual “Tank for Tua”—a perceived effort to lose every game in
rite of passage: a number of Analytic team members order to take star Alabama quarterback Tua Tagovailoa.
submit their guesses on which teams will be at the top But as typical with the NFL, nothing ever seems to go
and bottom of our NFL alpha results. While the lowest- as predicted. Tagovailoa suffered a season-ending
ranked team wasn’t much of a surprise, the top-ranked hip injury, and the rag-tag Dolphins decided to rally
one was. The Miami Dolphins finished with a whopping behind rookie coach Brian Flores. After starting 0-7, the
70.3% alpha, the highest for a team since 2009. As the team upset the New York Jets, Indianapolis Colts, and
underdog in all 16 of their games, the Dolphins were given Philadelphia Eagles to end up in slightly positive alpha
plenty of opportunity to outperform expectations. territory. But the best was yet to come.
2In week 17, Miami went into Gillette Stadium to face the Let’s examine two more cases in which one game had a
17-point-favorite Patriots, who needed a win to secure meaningful impact on teams’ alphas. The Atlanta Falcons
a bye in the first round of the playoffs. Should be a no- started the season 1-7, and rumors were flying that
brainer, right? Not for the resilient Dolphins. Journeyman head coach Dan Quinn was on the verge of being fired.
quarterback Ryan Fitzpatrick threw a touchdown pass After their bye week, the team had a tall task: going into
to Mike Gesicki with 24 seconds left in the game to give New Orleans to face the heavily favored 7-1 Saints.
Miami a 27-24 victory, resulting in a massive surge in In typical any-given-Sunday fashion, the Falcons upset
alpha (see Chart 1, below) and very likely contributing to the Saints 28-9, and their alpha jumped from -73.3% to
New England’s early playoff exit the following week. 6.6% (see Chart 2, below). Then they upset the 49ers 29-
22 in week 14 on the way to recording the third-highest
On the flip side, there are always the perennial alpha alpha of the season—39.4%—and managed to save
flatliners. This year, it was the Cincinnati Bengals. Quinn’s job in the process.
They lost star wide receiver A.J. Green to a fluke ankle
injury in a July training camp practice, and it was all The Los Angeles (NOT San Diego) Chargers had a similar
downhill from there. The team started the season 0-11 turning point in their season. After defeating the
before upsetting the Jets (notice a trend?) and Browns, Indianapolis Colts in week 1, the Chargers appeared to
locking in a -69.6% alpha (see Chart 1, below) and the be the same playoff-caliber team they were last year.
top pick in the 2020 draft. We’d like to add more color But it didn’t last. They went into Detroit and lost 13-10 to
here, but this was simply a bad football team. Take heart, the hapless Lions, causing their +45.2% alpha to plummet
Bengals fans. Having the worst alpha means that your to -27.4% (see Chart 2, below). The team stayed in
team will have the chance to draft your next franchise negative alpha territory the rest of the season, thanks
quarterback: Heisman Trophy and national championship partly to the declining play of quarterback Philip Rivers.
winner Joe Burrow of LSU. As the team prepared to move into the new Sofi Stadium
with their cross-town rival Rams in 2020, rumors surfaced
Chart 1. Cumulative alphas: Miami Dolphins and that the NFL may be realizing the error of its ways in
Cincinnati Bengals relocating the Chargers from San Diego and would
80 even consider moving the team to London in the future.
No word yet on whether we’ll eventually be calculating
60
alphas in pound sterling, but stay tuned.
40
20
Chart 2. Cumulative alphas: Atlanta Falcons and
Los Angeles Chargers
0
60
Alpha (%)
-20
-40 40
-60 20
-80
0
-100
Alpha (%)
-20
-120
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -40
Miami Dolphins Cincinnati Bengals
-60
Source: Analytic Investors
-80
-100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Atlanta Falcons Los Angeles Chargers
Source: Analytic Investors
3The “lottery ticket” Postseason struggles
Since 2004, the Analytic team has been managing low- The bulk of this paper has focused on the regular season.
volatility equity assets based on our published research, Now it’s time to focus on the playoffs and our predictions.
which demonstrates that low-risk equities tend to When we first published this paper back in 2004, it was
outperform higher-risk ones over time. As we’ve also based on our finding that teams who outperformed
outlined previously, there’s a similar trend in the world of expectations in one NFL season tended to underperform
football wagers. Specifically, bets placed on large favorites in the following season, and vice versa. We found this
with lower payouts (in other words, less risky) typically same relationship also exists between the regular season
outperform bets placed on heavy underdogs that pay out and the postseason. As a result of this football form
significantly more—often referred to as lottery tickets. of mean reversion, the team with the lower alpha is
In 2018, these higher-risk wagers outperformed lower- typically undervalued when compared with its higher-
risk ones for the first time since the 2015 season. alpha opponent.
This trend, albeit not as pronounced, continued in 2019. In the current postseason, this approach has resulted in a
Low-risk wagers returned -0.7% while higher-risk, 4-6 record, breaking our streak of 15 consecutive years
longshot bets returned 4.8% (see Chart 3, below)—an with at least a 50% postseason success rate. Two of the
outperformance of 5.4% and consistent with the stories of losses were by a mere half point: The Buffalo Bills blew a
the Dolphins and Falcons outlined above. A similar pattern 16-point lead to the Houston Texans and lost on a field
occurred in the markets in 2019 as high-beta equities goal in overtime, and the Seattle Seahawks failed to
generally outperformed their low-beta counterparts. convert on a late 2-point conversion attempt in a loss to
the Packers (see Table 2, below). Oh, that dreaded “hook!”
Chart 3. Low-volatility analysis 2019 season
10 Despite the above, our historical average now stands at a
respectable 59%.
money line wager (%)
5
Average return to
6.1% 3.0%
4.8%
0
-0.7%
-5
-10
-12.9%
-15
-11 and -4.5 to -4 to +4/ +4.5 to +10.5/ +11 and
above/low -10.5/fair average moderate above/high
Line/volatility
Source: Analytic Investors
Table 2. Postseason analysis (4-6 record)
Lower-alpha team
Higher-alpha team Alpha (Analytic’s pick) Alpha Favorite Result Win
Houston Texans 24.5% Buffalo Bills 19.1% Texans by 2.5 Texans 22-19
Tennessee Titans 17.5% New England Patriots -3.7% Patriots by 4.5 Titans 20-13
New Orleans Saints 43.7% Minnesota Vikings -1.9% Saints by 7.5 Vikings 26-20
Seattle Seahawks 29.4% Philadelphia Eagles -4.5% Eagles by 1 Seahawks 17-9
San Francisco 49ers 37.8% Minnesota Vikings -1.9% 49ers by 7 49ers 27-10
Baltimore Ravens 39.3% Tennessee Titans 17.5% Ravens by 10 Titans 28-12
Houston Texans 24.5% Kansas City Chiefs 24.1% Chiefs by 10 Chiefs 51-31
Green Bay Packers 38.7% Seattle Seahawks 29.4% Packers by 4.5 Packers 28-23
Kansas City Chiefs 24.1% Tennessee Titans 17.5% Chiefs by 7 Chiefs 35-24
Green Bay Packers 38.7% San Francisco 49ers 37.8% 49ers by 8 49ers 37-20
Source: Analytic Investors
4A second predictive approach: Computer-reading Super Bowl LIV
between the lines
Unlike last year’s game, which had two single-digit alpha
As if one predictive approach weren’t enough, in 2019 teams, Super Bowl LIV pits two teams in the top 10: the
we debuted a second one that’s based on machine sixth-ranked San Francisco 49ers (37.8%) against the ninth-
learning (ML). Even though last year’s ML prediction ranked Kansas City Chiefs (24.1%) (Table 3 on page 6).
incorrectly picked the Rams to win, we wanted to The 49ers also had the highest change in alpha from 2018,
give this approach another chance. So, we’re again at 82.6%. This is primarily because the 49ers had a league-
supplementing our traditional alpha model pick with worst -44.7% alpha last year, thanks largely to quarterback
a Super Bowl prediction courtesy of the machines. Jimmy Garoppolo’s season-ending knee injury during a
Readers may recall that our previous ML pick week 3 loss to—you guessed it—the Chiefs.
relied upon feature mining and gradient descent.
Particularly astute readers may recall that the pick This year’s game features two evenly matched teams: the
proved to be incorrect, in spite of encouraging Chiefs’ high-flying offense led by superstar quarterback
historical performance (55% accuracy). Mahomes going up against a stout 49ers defense anchored
by rookie pass rusher Nick Bosa. It also features two
This year we took a turn from straight statistical ML offensive-guru head coaches with something to prove:
and explored the value of natural language processing. young Kyle Shanahan, who was offensive coordinator of
What could we glean from the words of sportsbook the Falcons during their epic collapse to the Patriots in the
“sharps” themselves? To accomplish this, we collected 2017 Super Bowl, and veteran Andy Reid, who’s seeking
text from a group of professional handicappers that his first title in 21 seasons. The game is also reminiscent
explains the rationale behind their picks. For each of a previous Super Bowl, when the 49ers faced a young
team in each matchup, we took all sentences star quarterback in his second season as a starter. That was
justifying that particular pick and fed them into Super Bowl XIX in 1985, and they defeated Dan Marino’s
a deep, bidirectional linguistic neural network. Dolphins 38-16. Could history repeat itself 35 years later?
These are a family of language models that have a
powerful understanding of syntax and semantics. Our pick is the lower-alpha Chiefs to win the game by more
They exhibit superhuman performance on tasks than one point. Considering that our model has correctly
ranging from document summarization to predicted seven of the eight Super Bowls (88%) that have
prepositional logic—and they’re widely assumed to not involved the Patriots (dating back to 2004), we remain
automatically generate the words spoken by the cautiously optimistic about this selection. And speaking of
Joe Buck robot in the Fox booth. In our case, these the Pats: This model does not have a prediction on what
cutting-edge tools simply allowed us to quantitatively team Brady will be quarterbacking in 2020.
measure the pairwise similarities of all arguments in
favor of a particular pick.
Having created this distance matrix, we extracted
the maximum eigenvalue—roughly, the magnitude
of importance of the dominant argument being made
in this collection of sentences—and compared it with
the theoretical limit for this value. We interpreted
this distance as the overall conviction held by the set
of handicappers regarding the critical feature of the
matchup that leads to the pick. Then, we picked the
team having the more relatively dominant argument,
conversely going against the team whose advantages
weren’t widely apparent to our set of professional
handicappers.
This approach yielded strong performance in these
playoffs, with a 75% hit rate. For the Super Bowl,
it favors the 49ers by 1 point. We’re assuming this
machine pick is free of bias in spite of the fact that
our hardware is from the Silicon Valley.
5Table 3. Super Bowl results
Lower alpha team
Super Bowl Date Higher alpha team (Analytic’s pick) Favorite Result Prediction correct
XXXVIII 2/1/2004 New England Patriots (67.0%) Carolina Panthers (39.0%) Patriots by 7 Patriots 32-29*
XXXIX 2/6/2005 New England Patriots (33.5%) Philadelphia Eagles (12.6%) Patriots by 7 Patriots 24-21*
XL 2/5/2006 Seattle Seahawks (25.0%) Pittsburgh Steelers (11.4%) Steelers by 4 Steelers 21-10
XLI 2/4/2007 Chicago Bears (17.8%) Indianapolis Colts (14.5%) Colts by 6.5 Colts 29-17
XLII 2/3/2008 New England Patriots (22.9%) New York Giants (14.6%) Patriots by 12.5 Giants 17-14
XLIII 2/1/2009 Pittsburgh Steelers (33.6%) Arizona Cardinals (-6.4%) Steelers by 6.5 Steelers 27-23*
XLIV 2/7/2010 Indianapolis Colts (37.6%) New Orleans Saints (12.8%) Colts by 4.5 Saints 31-17
XLV 2/6/2011 Pittsburgh Steelers (28.6%) Green Bay Packers (1.3%) Packers by 3 Packers 31-25
XLVI 2/5/2012 New York Giants (32.8%) New England Patriots (15.8%) Patriots by 3 Giants 21-17
XLVII 2/3/2013 San Francisco 49ers (23.1%) Baltimore Ravens (2.2%) 49ers by 4.5 Ravens 34-31
XLVIII 2/2/2014 Seattle Seahawks (13.7%) Denver Broncos (4.6%) Broncos by 2 Seahawks 43-8
XLIX 2/1/2015 New England Patriots (28.2%) Seattle Seahawks (9.9%) Patriots by 1.5 Patriots 28-24
50 2/7/2016 Carolina Panthers (61.5%) Denver Broncos (31.9%) Panthers by 4 Broncos 24-10
LI 2/5/2017 New England Patriots (40.5%) Atlanta Falcons (29.2%) Patriots by 3 Patriots 34-28
LII 2/4/2018 Philadelphia Eagles (31.8%) New England Patriots (12.4%) Patriots by 4 Eagles 41-33
LIII 2/3/2019 Los Angeles Rams (9.7%) New England Patriots (-5.5%) Patriots by 2 Patriots 13-3
LIV 2/2/2020 San Francisco 49ers (37.8%) Kansas City Chiefs (24.1%) Chiefs by 1 ? ?
*While in these games lower-alpha teams did lose to higher-alpha teams, the predictions are correct because the lower-alpha teams covered their
respective point spreads.
Source: Analytic Investors
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