Understanding Assets
In a previous article, I detailed the main currency for rebuilding organizations: Draft Picks (“picks”). Draft picks are the primary currency used to rebuild, but draft picks are just one of three tradeable asset classes available to NHL clubs. These tradeable asset classes are Draft Picks, Prospects, and Players.
In the current framework of the NHL, these asset classes are available to all teams to use as currency between themselves on the trade market. This works as a loose currency exchange. Teams exchange or combine a mix of assets to purchase value in other forms from other organizations.
Draft Picks play a role in some of the mechanics of NHL contract management, such as a restricted free agent offer sheet. Among other league mechanics, picks are also a means of exacting punishment by the league, such as in the case of a tampering violation or other such breaches. A team in violation may be stripped of one or more picks in one or more rounds as a disciplinary tool. Draft picks are the most uncertain of the three asset classes and have the most extended runway for on-ice win contributions.
Prospects are the next stage in the development of a draft pick. Prospects are players that have yet to stake a permanent or full-time spot in professional hockey. Prospects potentially have a shorter runway toward on-ice contribution than draft picks. These prospects are generally unsigned or are on their Entry Level Contract (“ELC”), though there are exceptions. Due to this, their contracts and compensation are highly structured and potentially highly competitive. Because they are still developing, their skills and abilities are unrealized and not fully known or understood. Prospect value fluctuates more than Draft Pick value, but that inconsistency is a double-edged sword, as Draft Picks retain a more predictable exchange value year to year. A prospect is frequently the most speculative form of asset.
Players are at the end of the runway for successful prospects. Players are fully formed and established professionals with a demonstrated track record of on-ice output, dependability, and off-ice acceptance. In a league as risk-averse as the NHL, their performance track record makes Players the most certain of the three asset classes, and this quality has them in the highest demand. The other dimension that makes Players so valuable is that their win impact is available immediately, with no delay in on-ice contributions.
It’s The Economy, Stupid
The NHL trade economy works as a currency exchange. Single assets or groups are exchanged for their perceived value of different classes, or currency, of assets. Take, for example, the recent trade that sent premiere trade target Bo Horvat from the Vancouver Canucks to the New York Islanders.
That trade contained all three asset classes. The Canucks sent out a Player (with a salary modifier which we’ll discuss elsewhere) and received a Player in return. To compensate for the difference in value between the two players, the Islanders also sent the Canucks a Draft Pick (with another modifier) and a Prospect.
The Canucks have stated that their intention is not to rebuild, and to that end, the most valuable component of the trade return is likely the Prospect they received in return. They have identified an internal need for a potentially high-reward asset on a short-term trajectory. With two years remaining on his entry-level contract, the Canucks are banking on the Prospect to deliver on-ice impact quickly and are hoping those contributions will outpace his ELC-restricted cap hit.
On the other hand, the Islanders are looking to compete immediately, including help to get them into the playoffs this year. With a team full of mature players, the Islanders have concluded that their time to compete is now and were prepared to part with a variety of assets to improve immediately by adding an elite Player.
Buy for a Dollar, Sell for Two
In the second season of the television show THE WIRE, there is a scene where three guys from the docks are selling truckloads of drug manufacture precursor chemicals to shady international criminal interests. They seek cash as payment but are also offered the equivalent of wholesale cost heroin. The wholesale-cost heroin is worth perhaps 3-4x the straight cash payment.
The idiot of the group wants the payment solely in the wholesale-cost heroin. The risk averse accessory wants just the straight cash. The brains of the operation take payment, half in cash, half in wholesale cost heroin. The cash gives them a payment now, and the dope gives them a payment later. The dope requires another transaction, and the essence of the product implies risk, but the potential returns for taking some cash and holding the dope and selling at a premium is the best mix of lucrative return and risk.
Cash, in this analogy, represents the Player, a total value get-what-you-pay-for asset with little volatility. The dope represents picks and prospects, tantalizing for the potential of a quick turnaround and a high on-ice impact. Taking a mix of the two is fully maximizing the profit potential on the asset going out, in this analogy, the precursor chemicals. Taking an appropriate mix of assets for an NHL team will help garner total value.
Some teams do not receive total value in trades because they do not value specific asset classes. This can be an organizational issue from the top down or a byproduct of misjudging where their organization is on the rebuild to contention to rebuild cycle. Not valuing an asset class is a luxury afforded to contenders. Still, even then, managerial groups should strive hard to maximize the return on each asset, no matter how on the edges it may appear. Grinding out that extra asset has the potential for a big windfall. By targeting specific returns rather than entertaining the highest offer, teams leave excess value on the table when targeting predictability at the expense of potential.
Bridging the value gap is most easily accomplished through picks. Rounds five, six, and seven still yield players at a surprising rate, and teams that don’t value improving return on the margins will steadily lose out to teams that do. The more diverse your currency holdings, the better positioned you can be to take advantage of the shifting market and the less relative risk you have engaging in that market than your peers lacking currency.
The more assets you have, the less crucial each individual one becomes. In the same way a poker player with a significant chip advantage can bully a hand or even an entire table, teams with a stockpile of assets find it much easier to consummate trades than those more preoccupied with preserving their limited portfolio of assets.
Teams without assets will always find it more difficult to be successful in any avenue than teams that have prioritized asset accumulation.