05/29/2003 11:00PM

Smart money's in hedge fund

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NEW YORK - The owners of Funny Cide are in a financial position that is familiar to any horseplayer who has made it to the last leg of a multirace wager and now stands on the brink of a massive score. Not to take the romance out of a Triple Crown bid, but they're really supposed to do what any sensible horseplayer would: Hedge!

Let's say you go to the track and play the pick six and after five legs you're alive, but only to the odds-on favorite in the finale. You've put in a $200 ticket, and if the favorite wins the payoff figures to be around $10,000. Do you just nervously root and beg for the favorite, getting $10,000 if he wins and a crummy 5-of-6 consolation that might pay $62 if he loses?

No. If you have any common sense or regard for money, you're supposed to take at least $1,000, borrowing it with interest if necessary, to bet on all the other horses in the race and guarantee yourself a four-digit profit for the afternoon regardless of how the race turns out.

It's a little trickier if you're looking at hedging a $5 million payoff, which is what the Funny Cide group will get from Visa if their gelding completes his Triple Crown bid in the Belmont Stakes. There's not even a consolation payoff. It's $5 million or nothing.

Bob and Beverly Lewis and Prince Ahmed Salman faced the same situation in recent years with Charismatic and War Emblem, but their personal circumstances were somewhat different. The extra $5 million would have been nice for them, the way it's nice when you find a forgotten $20 bill in your coat pocket, but not exactly life-changing. For a 20 percent Sackatoga partner, however, $1 million is still a whole lot of money. If Visa were willing to settle for 50 cents on the dollar right now, the owners would be crazy not to take it.

Can they create such a situation for themselves? They could go to a bank, or just work the Trustees' Room at Belmont, borrow $2 million for the afternoon, and spread it around with proportional win bets on Empire Maker, Dynever, and the others. If Funny Cide is 6-5, they can probably get only about a combined 3-5 on their money by betting against him, maybe only $2.80 after their bets dropped everyone else's odds.

Would it still make sense? If Funny Cide wins, they'd be knocking their bonus windfall from $5 million to $3 million after subtracting the $2 million in losing bets. If he loses, they'd make about $800,000 on the bets instead of getting nothing.

Financiers debate the wisdom of such moves all the time on options and hog bellies, but these discussions can quickly veer into esoteric territory. Typing "optimal hedging strategy" into an Internet search engine yields a link to an abstract of a scholarly consideration of the issue: "With exponential utility," it explains, "optimal hedging strategy can be computed in reasonably explicit form using the methods of convex duality. In particular, a perturbation analysis using ideas of Malliavin calculus gives the modification to the exact replication strategy that is appropriate."

On the off chance this is not crystal clear, the Sackatoga owners may wish to contact the publisher of "Lehrstuhl fur Mathematische Statistik" at the University of Munich for amplification.

What they really need to do is find some jillionaire who thinks Funny Cide is a cinch and is willing to take even money. Sackatoga could just book his $2 million win bet. That way they would net $3 million if he wins, and still make $2 million if he loses.

The legality of any of these hedges is a bit murky. Owners technically are not supposed to bet against their own horses in New York, but it is unclear whether this would apply to a man-to-man wager or to such a unique situation.

Either way, it's kosher overseas. Betfair, the popular British wagering exchange that matches up bettors on different sides of propositions, announced just this week that it would allow owners (though not trainers and jockeys) to offer prices against their own horses. (Keep this in mind if you like a horse on Betfair - 3-1 might sound good but do you still want to play if it's the horse's owner who's offering the bait?)

Another option is to make a deal with the planet's biggest bookmakers: the insurance companies. Just as Visa pays a lot less than $5 million to insure against a Triple Crown winner, Sackatoga surely could negotiate a policy paying off on a Belmont loss.

Hedging against so bold and historic an achievement as the Triple Crown might seem unsportsmanlike, weaselly, and an act of titanic bad karma. Be honest though: If you'd never seen anything close to $5 million in your life, what would you do?