It has been 32 years since Affirmed won Thoroughbred racing’s Triple Crown, the last horse to do so. The folks at Versailles, Kentucky–based WinStar Farm thought they might have a chance of breaking the drought after their three-year-old bay colt Super Saver became the surprise winner of the Kentucky Derby in early May. But Super Saver faded in the Preakness, finishing eighth in the second leg of the Triple Crown.
Kenny Troutt, co-owner of WinStar Farm and owner of Dallas–based family office Mount Vernon Investments, was no doubt disappointed, but by now he probably is used to the emotional peaks and valleys of the world of horse racing. Troutt and Bill Casner, co-founders of telecom company Excel Communications, bought the racehorse operation, set on 1,400 acres of Kentucky bluegrass, in 2000. Troutt made his fortune when he sold Excel to Teleglobe (now part of India’s Tata Communications) for $3.8 billion two years earlier.
Over the past decade, Mount Vernon, under the guidance of president Nicholas Merrick, has become known for its skill in investing in small and emerging hedge fund firms. Merrick, the former CFO of Excel, agrees that this talent has a lot in common with picking racehorses: Both endeavors rely on a keen understanding of background and pedigree, and an eye for what makes unproven candidates winners. “Bloodline is really important,” he adds.
Betting on good breeding in either business can be hit-and-miss. There have been hedge funds started by former star traders at, say, Goldman Sachs that have excelled, but others have bombed. For both hedge funds and horses, Merrick says, “you also need a lot of luck.”
Another rule of hedge fund investing — diversification — is also true on the track. By the time the Belmont Stakes, the final race in the Triple Crown, rolled around in early June, Super Saver was being rested. WinStar had another outside prospect in the running: Drosselmeyer. The chestnut colt came from behind to beat Fly Down and pacesetter First Dude (named in honor of the husband of former Alaska governor Sarah Palin) and claim the top prize.
