Few things in life are as easy as a layup or as certain as a slam dunk. We have taken these terms from basketball to describe everyone’s favorite opportunity, a sure thing……..So why is everyone shooting the “Three?”

It’s called risk-adjusted return and it took an NBA team owned by West Coast VCs and operated by a team of quants to figure it out.¹ The Golden State Warriors ran the numbers, drafted Stephen Curry, traded for Klay Thompson and told them to put up the Three, as often as they could. The results speak for themselves, with the Warriors appearing in the NBA Finals for the past five years.

Why bother attempting a shot from 24 feet to earn two points when you can step back one foot and shoot for three? During the 2018-2019 NBA regular season, Stephen Curry took 244 shots in the band from 20 to 24 feet from the basket, making 123 for an average of 50.4%. Incredibly, he took 554 shots from 25 to 29 feet from the basket, converting on 234 for a shooting percentage of 42.2%.² Why, his coach must ask him constantly, would he ever pull up from 24 feet?

Of course, in the investing world, the court is a little different. First, there are no slam dunks or layups. The closest we get is a Treasury Bill. And the Wall Street court doesn’t have just one three-point line, it has a line every few inches, each one a little farther from the basket, making the shot just that much harder, but presumably paying a few more points. Imagine a basketball game where the dunk is .25 points the layup .50, the foul line three, top of the key four and the current three-point line worth five.

Perhaps the line investors should pay most attention to is the free throw line. Having been fouled by a player on the opposing team, the free throw shooters gets to stand alone, unguarded a mere 15 feet from the basket and attempt a shot they have practiced hundreds of thousands of times. If they can block out the distractions of a screaming crowd, methodically run through their pre-shot routine and let their muscle memory take over, they are very likely to earn another point for their team. The best score more than 90% of these shots. During his career, Curry has made 1,305 of 1,450 foul shots for a percentage of 90.4%!  Over the course of two seasons in 1993, a young man named Michael Williams made 97 consecutive free throws. Maybe that’s why they call this line the “charity stripe.”

In putting their teams on the floor, coaches and investors examine statistics. While coaches focus on shooting percentages from different spots on the floor — “shot selection” in NBA speak — investors concentrate on measuring risk-adjusted returns, or the return on an investment compared to the risk assumed to make that investment.  At the end of the day, it’s all about finding the shooter and the shots that best fit your overall plan and your tolerance for risk.

The newly crowned NBA Champion Toronto Raptors took a chance on Kawhi Leonard this year and it worked well, despite the fact that he took only 143 shots from between 20 and 24 feet last season, making a paltry 57 of them for an average of 39.9%. He did, however, manage to put up 333 shots from within 5 feet of the basket, converting 221 for an average of 66.4%. He also made 364 — or 84% — of the 426 free throws he attempted.

How do you spell MVP?

DISCLAIMERS AND OTHER IMPORTANT INFORMATION

Confidentiality and Non-solicitation: No information herein constitutes an offer or a solicitation to buy or sell any securities or any interests in any product or investment strategy managed by HCG Fund Management LP (“HCG”).  Any offer or solicitation relating to any such investment will be made only by means of confidential offering documents relating to a particular fund  or investment contract and only in those jurisdictions where permitted by law.

Reliance: This information may not be relied upon for investment decision-making purposes. It does not contain all the information necessary to make an investment decision, including the risks, fees, and investment strategies of investment products advised by HCG. Eligible investors are described in official offering documents, all of which must be read in their entirety and will supersede the information contained herein.  No offer to purchase any securities or interests by a prospective investor will be made prior to receipt of all official documents, and no offer to purchase any securities or interests will be accepted without receipt of all official documentation that has been completed to HCG’s satisfaction.

Opinions — No obligation to update:  The information contained herein represents the views and opinions of HCG.  It is intended solely for informational purposes and is not intended to constitute investment, legal, tax or accounting advice.  The views about digital finance investing and estimated future investment opportunities expressed herein reflect those of HCG management as of the date herein and are a reflection of our best judgment at the time.  They are subject to change based on market and other conditions, and we have no obligation to update.  Actual results, however, may prove to be different from our expectations.  No warranty is given to the completeness or the accuracy of the information contained herein.

Suitability and Risks:  Any investment in products managed by HCG is appropriate only for financially sophisticated investors capable of analyzing and assessing the associated risks fully disclosed in the Private Placement and/or Information Memoranda. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The Private Placement and/or Information Memoranda contain this and other information about the investment. A prospective investor should have no need for liquidity with respect to its investment and should view it as long-term and not a trading vehicle.  Additional risks are disclosed in the Private Placement and/or Information Memorandum including, including, limited liquidity and restrictions on transfer of the securities, dependence on HCG’s principals, and short operating history of certain products. As with all private investment funds, investments are deemed speculative and involve risk of loss.

Third Party Data: We do not verify third party data used in certain calculated metrics shown here.