Why Are Hedge Funds Betting on Sports and Why Does It Matter?
As the world of sports betting continues to expand on the strong back of the digital revolution, former finance professionals are taking their skill sets to the sports betting world via hedge bets. Once inconceivable, there are now over 10 sports betting hedge funds in operation around the globe. In this article, we explore some specific funds and reveal some of the methodologies behind them.
What’s a Hedge Fund?
The shortest way to describe a hedge fund is as an alternative investment that uses pooled funds (in a variety of ways) to earn an active return for investors. For our purposes, the hedge funds we discuss are exclusively related to sports betting.
Hedge funds are only available to accredited investors. They are not as regulated as mutual funds, nor other similar, low-risk investment vehicles.
How Does a Sports Betting Hedge Fund Differ?
Officially, sports betting hedge funds refer to themselves as “sports betting entities.” Experts bet with their client’s money using the same principles as mutual funds, except they bet on sports instead of investing in traditional financial instruments.
It’s important to clarify that these hedge funds are not traditional “tipster” companies, nor are they selling picks in any way. Experts make bets on sports with their investor’s money and are in total control of all capital invested in the fund.
Who Started Sports Betting Hedge Funds?
Fundamentally, finance revolves around this same principle. First floated around by Mark Cuban in 2004, sports betting hedge funds eventually took off with Centaur Galileo in 2009. Other firms would follow suit.
Professionals believed that by applying a wider variety of fundamental financial strategies to sports, they could create something truly innovative: a sports betting hedge fund. Sports betting is about predicting future outcomes, and in fact isn’t really all that different from the stock market.
Why This Is Perfect for Today’s Market
Some of the best and sharpest minds from the world of finance are now in an infinitely more exciting line of work; betting on sports. In the era of record low returns on multiple asset classes (the real and nominal yields on government bonds are currently mostly negative), investors are searching for new, creative investment vehicles. This has led to those with traditional finance backgrounds exploring innovative ways that result in optimal returns.
By retaining skills and practices from traditional financial practice and applying them to sports hedge bets, financial wizards believe they can predict successful events. This is no different than traditional hedge fund purchasing practices.
Bookmakers strive to get equitable action on both sides of a wager. They don’t try to predict a result, and only try to ensure they don’t get exposed to massive losses, leaving tremendous opportunity for bettors. With available features like live betting, hedging bets has never been easier. Just because you place a bet that’s set to fail, it doesn’t mean that you have to lose everything you’ve wagered.
How Does Hedge Fund Sports Betting Work?
Sports betting funds experts assert that successful sports betting is nothing more than a sophisticated mathematical equation. Quantitative analysts (often with PhDs in Mathematics or Physics) combine complex and varied pieces of data with machine learning to create proprietary algorithms. To quants, it’s all data to input. In fact, most have zero interest in sports.
The individuals constructing these systems generally don’t even have too much of an interest in sports; they just build systems for predicting outcomes. To them, it doesn’t matter if its sports or the future of the S&P 500. It’s all just different data to input.
These hedge funds don’t base their bets exclusively on techniques borrowed from finance. They also incorporate traditional methods or – as they call them – “qualitative methods”.
Sports hedge funds employ “watchers” who review games both on television and in person. These individuals gather objective and subjective statistics to feed back to the quants. For individuals employed by these firms, it might mean watching over 10 games a day (across sports) and submitting in-play reports as often as every 10 minutes!
What Is the Process for Reporting Data?
The reported data goes far beyond the ordinary. In soccer, “watchers” will not only report regular statistics (corners, shots, etc.), but they also record anything that – they believe – is related to the final result. These details might include the manager’s mood, to the sentiment of the crowd to the weather. There’s always data to be accumulated at a sporting event.
Firms employ analysts who work with traders to interpret the data and place the sports bets through different books around the globe.
Centaur Galileo: An Early Sports Betting Hedge Fund Failure
Centaur Galileo, directly inspired by Mark Cuban, claimed to have a proprietary quantitative model that could make bets that garnered tremendous returns for their investors. They aimed for 15-25% returns, which was an incredibly lofty projection for a (relatively) small firm.
Ultimately, Galileo was too good to be true. It folded in 2012, after losing $2.5 million of investor money. In the press release, they chalked up their dissolution to “sheer bad luck.”
While quite advanced, Centaur Galileo wasn’t quite ready. Overconfident in their system and basing their capital management on unsustainable growth/returns, Centaur likely increased their unit sizes (amount bet per event) more than they should have. This likely led to their dissolution and catastrophic losses for investors.
A Resolute Success: Priomha Capital
Priomha Capital (The Cloney Multi-Sport Investment Fund) is undoubtedly the largest, most successful and most notable of all the sports betting hedge funds. Established in 2009, Priomha invests in sporting events which stretching across different professional leagues. They don’t reveal their methods or the specifics of their bets, but by the end of 2011, the fund generated a staggering 118% percent return.
To put this in context, the S&P 500/ASX 200 lost 17.4% over the exact same time period. Unlike Centaur, the fund exercises careful risk management procedures and is audited quarterly.
According to Bloomberg, Priomha provided its clients (after the fees they charge) an astonishing 17% ROI from 2010-2015. The fund has returned over 220% since founded in 2009. With such incredible returns and unique methods, Priomha has raised the eyebrows of not only sports bettors, but also fund managers everywhere.
The Real Potential of Sports Betting Hedge Funds
Betting on sports through a hedge fund has a ton of utility for investors. Sports are an uncorrelated asset, recession-proof, and have low volatility. Oh, and they provide massive returns too.
1. It’s Not Correlated to Anything in the Stock Market
Massive political and economic events have been proven to have little-to-no correlation with sporting events. What does this mean? That making bets on sports are the “ultimate uncorrelated asset class.”
Investors looking to diversify their portfolio can do so with sports betting funds. As we’ve already mentioned, it’s possible for sports betting hedge funds to create safety measures and hedges, thanks to the digital revolution in sports betting.
2. Massive Returns
The returns of sports betting funds are impressive, as long as they exercise proper control over their capital. ROI speaks for itself.
3. Recession Proof
Finance is unbearably complicated these days, and systemic risk in one’s portfolio is a difficult thing to manage. Putting money in a sports betting hedge fund is recession proof; its impervious to the broader events of global finance.
4. Lower Volatility
Most alternative assets (and the hedge funds that bet on them) have significant volatility. If managed correctly, this shouldn’t apply to sports betting funds. They’re able to generate substantial funds without leverage, and subsequently without the downside risk associated with most alternative funds.
The Future of Hedge Funds May Be in Sports Betting
If you need more proof that sports betting is now 100% legitimate, there is no stronger evidence than multinational money managing companies running viable firms with stringent capital restrictions. With incredible technology at our fingertips, it’s never been easier to place careful, educated sports bets.
The cardinal rule of Betting 101, however, is to always manage your capital successfully. If something is too good to be true, it usually is. This applies to hedge funds as much as it does to the average joe sports bettor.