Risk management doesn’t just apply to insurance or investing. It is necessary in anything from managing your health (should I eat that fried Twinkie?) to managing supply chains (do we need a backup supplier?).

Today I am going to discuss how risk management can help you win your fantasy football league. It doesn’t matter if you know anything about football – real or fantasy – you can still follow the lesson.

Fantasy football is much like buying a mortgage backed security. You’re not making the mortgage loan. Instead, you’re betting on the performance of a pool of borrowers relative to expectations.

The goal is fantasy is to assemble a “security” composed of players that generate the most impressive statistics (touchdowns, yards, etc.)

Christian McCaffrey is the most valuable player in fantasy football. He was the first pick in every fantasy draft.

The only reason you wouldn’t have picked him is if you were worried about injury risk. If he were injured, you likely wouldn’t have any good options available on your team to replace him, so you would likely be headed towards last place.

If you wanted to hedge that risk, you could have also drafted his backup, Jordan Mason, in the last round, as most backups go undrafted.

While Mason is not as good as McCaffrey, he gives you maybe 80% of the production. Given his cost is <1% of McCaffrey’s, this seems like a bargain.

Yet, as you will see, very few McCaffrey drafters also picked Mason.

Tail Event

So you can probably guess what happens next…

McCaffrey was hiding an injury! There were vague disclosures about it in preseason, but it was dismissed as minor.

For added context, McCaffrey missed major parts of the 2020 and 2021 seasons due to injury. In past years, people argued not to draft him #1 because he was injury prone but, after two healthy seasons, those fears had been forgotten.

People assumed this unknown injury was minor. Spoiler alert: It wasn’t minor!

Just before kickoff of the opening game, it was announced McCaffrey wouldn’t play and Mason would start in his place.

This led to a mad scramble nationwide of fantasy football players seeing if Mason was still available in their leagues. Sometimes he was, but often he was poached first by another team leaving the McCaffrey team out of luck.

Even after that, people still assumed it was a minor injury and he would only miss another week. Then, just before his week two game, he was announced out again and placed on injured reserve keeping him out for at least a month.

It now seems likely he will miss half the season and some are suggesting he won’t be back at all.

Even if he does come back in November, teams that drafted him will likely be too far out of the playoffs to benefit from his return. Unless that is, you bought reinsurance.

Reinsurance

Wait, there is reinsurance in fantasy football? Not really, but sort of.

Think about it. What situation have I described? You are trying to protect from a tail risk, in this case an injury to a star player.

You can either avoid the risk by picking a different player first in your draft (i.e. declining the risk). Of course, that player also has injury risk, but perhaps less.

Or you could have made sure, if you took McCaffrey, that you also took Mason. Mason was an XOL contract!

As noted earlier, he gives you something like 80% of the production at 1% of the cost. That is incredibly cheap tail cover!

In most drafts I was in, he went in the last or next to last round. Most players taken that late end up having no value over the course of the season.

So the opportunity cost of buying reinsurance was incredibly low. Conversely, the opportunity cost of “going naked” was very high = your season would be ruined.

It was foolish not to buy reinsurance on McCaffrey. Yet…

Lack Of Hedging

In all the drafts I did, only once did the person who took McCaffrey also take Mason.

Hint: I have McCaffrey on just one of my teams.

That means in every other league, the McCaffrey drafter did NOT buy reinsurance.

In several cases, I picked Mason at the end of a draft, even though I didn’t have McCaffrey.

Why? Because it was like buying a cheap ILW. I wouldn’t miss the premium if nothing happened, but I’d make a lot if the wind blew.

One thing I should note is I don’t try to pick every team’s backup running back. There aren’t enough spots on the team for that. I don’t even usually pick the backup for my first team running back.

Why? Didn’t I just tell you the reinsurance was super cheap? Yet, but not always. I believed Mason was likely to be very productive if McCaffrey got injured.

That is not always the case with backup running backs, so you have to evaluate whether you think the backup is good enough if they end up starting (i.e. how low does the cover attach) and what you think the injury risk is to your star player.

Sometimes it is better to do what I did with Mason, which is take the backup of one of your opponent’s stars, rather than your own, as this boosts the ceiling of your team. (You don’t just get 80% of what you had, you get what you already had plus something.)

In other words, most of the time when I drafted Mason, I was taking basis risk. I was hedging against another team’s injury, not my own, to increase my upside.

Risk Management vs. Forecasting

I should make clear I did not have any information, or even a concern, that McCaffery was hiding a more serious injury before the season started. That isn’t why I picked Mason.

If I had strong view that the injury was worse than let on, that would have been a prediction. I wasn’t trying to make a prediction here.

I was trying to remove the risk of a known unknown.

It was unknown whether McCaffrey would get injured this year or not, but I knew what to do if he were.

When people say luck is the result of preparation, this is what they mean. It wasn’t lucky that I drafted Mason for a number of my teams. It was proper risk management.

Takeaways

So what should you take away from this? There are plenty of places in life where you can buy cheap reinsurance.

And most of them don’t require Guy Carpenter’s help! Whether it be fantasy football, personal finance, operating a business, etc., never turn down cheap reinsurance because you don’t think you need it.

You never know when it will come in handy!

I should also point out the difference between cheap reinsurance and cheap options. I love cheap options too! A lot of what I did in investing was looking for cheap options.

The difference is a cheap option is something where you realize an outsized benefit for little cost (think of a mortgage prepayment option which costs you nothing but can lower your payment a lot) while cheap reinsurance is where you avoid a painful loss for low cost.

(And yes, I am aware you can buy options that prevent a loss rather than seek a gain, but trying to keep things at a more intuitive level here.)

You obviously can’t hedge every risk (even MGAs have risk, though they often forget this) so it is important to understand where your biggest exposures are to a negative outcome and focus your hedging efforts there.

Hedging is a habit. The more you practice it, the more opportunities you will find to take advantage of it.

After all, hedging your fantasy football team is a nice win, but it’s not life changing. Having extra umbrella coverage or setting up a disaster recovery site for your business can be.