Hi, this is not really related to CFA, but I always wondered why Hedge Funds don’t diversify into these areas. Sports betting (‘investment’) is very similar to speculating in financial instruments, and games such as poker and black jack are also very beatable when played by good players. Is it just legally messy for a hedge fund to engage in these activities, because I can’t imagine hedge funds unable to make a ton of money going into these areas. I know this question might be silly, but just wanted to have some feedback on this from intelligent folks. thanks!
probably liquidity for the most part. Also, not enough access to the pros who do it already. It’s a lot easier to scoop a trader from a bank, than to hire an experienced gambler… If you’re a successful sports better, why would you go and work for a hedge fund?
I have a feeling that the market may not be able to absorb the Trillion dollars or so of Hedge Fund money. There are also some legal restrictions, I suspect. It’s probably harder to hedge and do appropriate risk controls in this field, so it would be more speculative. And finally, it may be more difficult for marketers to explain to potential investors that your competitive advantage is that you have a better sports forecast than others, and therefore your sharpe ratio or information ratio is stable. Of course, results are probably uncorrelated with the markets, so there may be a diversification benefit to a portfolio if you have at least a little skill. My bet is the main problem is that the industry can’t handle the massive capital flows that would go in from hedge funds, and that it’s probably more profitable to invest in a gambling casino or sports betting business than to do gambling or sports betting oneself. One of my favorite quotes comes to mind here: “If you bet on a horse, that’s gambling. If you bet you can make three spades, that’s entertainment. If you bet cotton will go up three points, that’s business. See the difference?” - Blackie Sherrod (someone I don’t know but I like what he said)
i was thinking the same thing. i would focus on boxing.
Not alot of growth potential in a ~50/50 blackjack game, that has been adjusted to adapt to player strategies (4 deck shoes vs card counting, etc; highly trained security, thousands of cameras and computer systems vs any strategy giving players an edge). I’d invest in poker sites that invest in individual players for marketing purposes, but the players themselves??? Don’t know if I’d put that much faith in a career gambler.
If you found sports betting arbitrage, they’d be all over it I think.
MIT Blackjack team was essentially a hedge fund set up to blackjack. IIRC, they had investors into an LP structure with a management and performance fee. I believe they’re still in existence, although they’re being much more secretive this time around. Other problems with this idea: Liquidity, tradesports.com notwithstanding. The Vig. There’s no natural market for hedgers, it’s all speculators. I certainly see why an NFL team might want to hedge against a losing season, but I believe this is discouraged. It’s not a true derivatives market, because there is no underlying asset. This means speculators can’t hedge. Although I did design some pretty slick trades for the last Super Bowl, those aren’t available for most games.
man forget ER, I would love to be a research analyst for a fund on a NFL or CFB prop betting desk
I don’t agree that “There’s no natural market for hedgers, it’s all speculators”. Considering how important sports are to many cities and the prestige a winning sports team brings to it, then I would imagine that there would be a sizable negative economic impact if the cities’ favorite sports team were to become perennial losers. Businesses such as sports bars, sportswear stores, and entertainment/restaraunts surrounding the stadiums are the most obvious ones that comes to mind, and I would imagine businesses that receive much of their money from tourism would also be negatively impacted. Right now, there is no practical way for these businesses to buy ‘insurance’ on a losing season. Would a market for BSPS (bad sports team swaps) really not be in demand? I personally think this is a big market that has remain unexploited, and would be a market for such as instrument if it were ever to be created…
The people with the most to lose are obviously the teams themselves, and they clearly can’t play in this market. You really think the manager of Vinny Slim’s Bar is going to get into the BSPS market?
Wouldn’t one think that there is a lot of room for manipulation in this market?
good point HoldSideAnalyst. I’m trying to think of what would happen if hypothetically the Red Sox, Patriots, Bruins, and Celtics were to become losing teams. How much of a negative impact would this have on the city? Would the state or city consider it worthwhile to hedge against this risk because of possible lost tax revenues?
Well, right now most leagues hedge themselves through revenue sharing plans, so there is no real need to hedge themselves as their profitability isn’t as volatile as you’d think…
I can’t believe this disussion has no reference to Betfair. On Betfair you can back or lay (i.e. go long or short) just about anything sporting. So hedging is fairly simple, and additionally you only pay commission on your profit within a given market irrevelant of the number of trades. Betfair taught me more about financial markets than CFA! I think liquidity is the main problem as large sporting events only have 20 odd million traded on them. Still, I would love to have a database of all starting odds for all events because I’m sure there is a statistical arbitrage out there. For example, a friend of mine believes, and has won a lot of money by backing the worst team in the world cup group stages to be ahead at half time and the best team winning the match. The odds for this are often derived from typical football games and understate the likely in the world cup group stages. Also, today Betfair has launched Tradefair. It will be interesting to see what the financial community makes of it - almost worth a separate thread. ps the NFL market on Betfair will be poor due to restrictions on US gamblers
Can you imagine an institutional investor (perhaps a pension fund) allocating 5% of their assets to sports gambling? Come on… Also, the definition of investment would (I think!) preclude such an eventuality -> I think the word “investment” entails the purchase of an asset. Otherwise, I agree with the poster that said “why would the successful ‘sports investor’ do it?”, esp. in view of liquidity considerations flagged above. The reason a HF manager manages a HF rather than trading his own cash is #1 to leverage his own personal alpha, right? He can do this b/c there is sufficient, not to say abundant, liquidity.
Uh, because it’s a dumb idea for the practical reasons mentioned above. More than that - succesful hedge funds and investment shops in general make money through economically valuable activities like risk transference, arbitrage to maintain market efficiency, taking on liquidity problems, moving capital from where its not needed to where it is needed, etc. “If you bet cotton will go up three points, that’s business” is so because taking a long position in cotton provides a nice hedge for a cotton producer who just wants to jump down, turn around, pick a bail of cotton instead of worrying about price risk. He might be willing to pay you to take that away from him. Then we can produce more boxer shorts cheaply so we wouldn’t have to wear the old stained ones.
Also, nobody mentioned the counterparty risk you would expose yourself to. What if congress freezes offshore accounts again?
Not enough upside for any fund. For example…on a typical sports bet arbitrage, the gambler (even though its not gambling) will make 1 or 2% on his money. To make the bet even worth anything to a fund, it would have to put up a substantial amount of money (obviously). There isnt a company/ website out there that could bankroll a bet like that. Even if there were two, the chances of the arbitrage opportunity involving those two websites is slim to none. Could you imagine calling up some lady at the customer service center for a sports betting website and explaining that since the website only allows bets up to $100,000, you need her to take your bet of $1,000,000,000 over the phone. “Um…would you like to pay with Visa or Mastercard sir.” HAHA
… and also a hedge fund could just buy stock in a casino. Duh. I had a gambling concept that relates to financial markets: Premise: The “root” of all games of chance is some sort of random outcome… a coin toss, a deck of cards, a roulette wheel, etc. In sports gambling, the outcome of the team is the “root”. These traditional gambling “roots” or kernels are a ZERO sum game. The house has slighly higher odds than the other person. The financial markets are not a zero sum game (unlike what some teach). Companies are creating value by combining resources, buying, selling, etc. What if you could make an easy & immediate, highly leveraged gambling device that’s root was the stock market? Of course anyone could buy stocks and sit on them for a few days but that’s not IMMEDIATE or LEVERAGED enough. I want to put $1 in a machine. For 20 seconds I watch some colorful lights and then… boom, I either have $2 or I have zero. If over time the stock market returns an average of 10% per year, then a minute by minute basis that is .00002%. If the annual standard deviation is 14% then the minute by minute standard deviation is probably like .00003%? So… what kind of fancy financial instrument could take all that into account and give me a gambling product that turns $1 into $2 if the market goes up, and $1 into $0 if the market goes down? I get the copyright.
>So… what kind of fancy financial instrument could take all that into account and give me >a gambling product that turns $1 into $2 if the market goes up, and $1 into $0 if the >market goes down? I get the copyright. Binary betting. You’re a bit late. http://www.finspreads.com/IFXWeb/Finspreads/Code/en/Main/index.aspx?MainMenu_Selected=ActiveBinaryBets http://www.binarybet.com/