Sign in / Join

This is no fantasy

In the U.S. we have fantasy leagues. In European football you can buy shares in the real thing, or close to it. Today's WSJ reports on a Portugese hedge fund that invests in the transfer rights to soccer players.

Nuno Goncalves is pulling hard for Portugal in the World Cup, but with more reason than most of his countrymen. The Lisbon-based hedge-fund manager has an investment in Ricardo Costa, a 25-year-old defender on Portugal's team.

The 33-year-old Mr. Goncalves, who runs three funds with about $14 million of investments for Football Players Funds Management Ltd., buys and sells interests in the rights to soccer players from Europe, Brazil and elsewhere. When one of his 15 players excels, and a wealthy franchise makes a bid for him, Mr. Goncalves's firm shares in the profits from the deal.

Absent transactions cost and related considerations, these entities would presumably just deepen liquidity in the football market. But I'm not sure that their influence is completely benign, since they profit only when a player changes teams. Here is how the system works:

European soccer teams rarely trade players as U.S. professional sports do. Instead, deals generally involve cash payments from one club to another for the rights to a coveted player. Wealthy teams can spend $40 million or more to acquire a star. If the player is keen to move to a new team, the player then will negotiate a new salary with the buying club and a transfer takes place.

Mr. Goncalves searches for unknowns on youth teams run by major Portuguese clubs with which his firm has forged an alliance. When they get interested in a player -- usually a teenager in Brazil or Portugal -- Mr. Goncalves's company and one of its partner clubs make a cash offer to a local, neighborhood team for the player's rights, usually for less than $1 million.

In a typical deal, Mr. Goncalves's firm, a unit of Orey Group, a Lisbon-based shipping and industrial conglomerate, contributes about 15% of the cost of buying a player's contract, with the professional team kicking in the rest. That gives Mr. Goncalves's fund a 15% stake in the player, while reducing any loss for the team if he doesn't pan out. If the player does well and a wealthier team comes calling, the fund and its partner club sell the player's rights at a higher price.

Goncalves owned a share of rights in Ronaldo, who moved from Sporting Lisbon to Manchester United three years ago. Ronaldo would have moved up the food chain regardless, but Goncalves's $6.7m share of the deal certainly didn't keep it from happening.

The firm typically has the transfer rights for a duration of three to five years. That might motivate "early" transfers, but a similar incentive applies when the rights are entirely owned by the team, as the player's contract to perform is similarly limited in duration. My guess is that the Rottenberg-Coase theorem applies to a first approximation, and the existence of the hedge fund doesn't have a big impact on the timing of player transfers. But adding an additional party surely complicates the bargaining, and may give early moves an additional push.