Sports hedge fund?
Sports hedge fund? Sports offer great opportunities for alpha capture. Sports are full of inefficiencies and mispricings just like the financial markets. It is interesting how buying a stock is commonly regarded as "investing" but sports bets are "gambling". With skilled analysis, future winning teams and players can be identified, as can winning stocks. Short selling prospective losers is even better.
Investing is very much like sports; talent, hard work, dedication and having an edge others don't have. The golfer that beats par is skilled while the fund manager that outperforms their benchmark is just lucky? Investors are supposed to be satisfied with the "average" performance of an index fund but you don't see many "average" sportspeople on TV. Finance academics say there is no such thing as investment skill! Everyone has equal sporting ability as well, right? Silly.
$7 billion will be bet on the Super Bowl, almost all irrationally. Larger amounts will be bet on the Soccer World Cup. The favorite is usually overpriced in most sports. Another anomaly, among many, is the tendency towards geographic bias. Many bettors favor the team whose name they geographically most closely identify with, even when the owners, players and managers have no such locational origination. Those who gamble based on emotion or patriotism lose money.
Geographic bias occurs in stock markets as well; US institutional investors hold more General Motors GM and Ford F than Toyota despite that under any sensible investment metric, Toyota is the better AND safer investment. GM and F are in the benchmark so MUST be owned while TM is foreign. Meanwhile Japanese investors have more cash in the Nikkei than the S&P 500 despite the Nikkei having the worse outlook. Whether it is stocks or sports, it is a skilled quantitative and fundamental evaluation that enables accurate bets to be made after elimination of such institutional rigidity and local bias.
Sports produce a vast array of statistics, which with the right tools can be data mined for PREDICTIVE information. Take horse racing. I know quants who have taken serious money (USD 100 million+) out of just Tokyo or Hong Kong horse racing. Most bets are made based on the lucky number of the jockey or the feng shui of the stables or another irrelevant metric. Such illogicality allows the rare skilled, disciplined bettor to arbitrage the many unskilled and irrational.
In every sport, teams build up a database of results. Drilling down, each individual player or horse builds a career track record. Just like a stock, if you evaluate the data closely enough you will be able to make better bets than "random" would imply and arbitrage the prices of those who set the odds and spreads. And read Moneyball for how statistics are used and abused in baseball.
Nowadays with sports betting in reasonable size easy to implement and with significant global capacity, I would expect sports hedge funds to emerge. Before I entered finance I ran my own personal sports betting hedge fund as a teenager. It will be fascinating to observe investor reaction to what, to me, is obvious; making stock picks and sports bets is the SAME underlying investment process. Putting money on the Dallas Mavericks or Tiger Woods is structurally isomorphic to betting on Google GOOG or oil prices.
Develop an informational or analytical edge, be it quant, fundamental or both, make many bets in many areas and arbitrage the emotional and uninformed. Maybe someone will set up a sports hedge fund or would that look uninstitutional? Bet on the stock market or the sports market? BOTH as they offer different sources of return. And sports results do NOT depend on the economy. DIVERSIFICATION of alpha sources is the way to go.
Investing is very much like sports; talent, hard work, dedication and having an edge others don't have. The golfer that beats par is skilled while the fund manager that outperforms their benchmark is just lucky? Investors are supposed to be satisfied with the "average" performance of an index fund but you don't see many "average" sportspeople on TV. Finance academics say there is no such thing as investment skill! Everyone has equal sporting ability as well, right? Silly.
$7 billion will be bet on the Super Bowl, almost all irrationally. Larger amounts will be bet on the Soccer World Cup. The favorite is usually overpriced in most sports. Another anomaly, among many, is the tendency towards geographic bias. Many bettors favor the team whose name they geographically most closely identify with, even when the owners, players and managers have no such locational origination. Those who gamble based on emotion or patriotism lose money.
Geographic bias occurs in stock markets as well; US institutional investors hold more General Motors GM and Ford F than Toyota despite that under any sensible investment metric, Toyota is the better AND safer investment. GM and F are in the benchmark so MUST be owned while TM is foreign. Meanwhile Japanese investors have more cash in the Nikkei than the S&P 500 despite the Nikkei having the worse outlook. Whether it is stocks or sports, it is a skilled quantitative and fundamental evaluation that enables accurate bets to be made after elimination of such institutional rigidity and local bias.
Sports produce a vast array of statistics, which with the right tools can be data mined for PREDICTIVE information. Take horse racing. I know quants who have taken serious money (USD 100 million+) out of just Tokyo or Hong Kong horse racing. Most bets are made based on the lucky number of the jockey or the feng shui of the stables or another irrelevant metric. Such illogicality allows the rare skilled, disciplined bettor to arbitrage the many unskilled and irrational.
In every sport, teams build up a database of results. Drilling down, each individual player or horse builds a career track record. Just like a stock, if you evaluate the data closely enough you will be able to make better bets than "random" would imply and arbitrage the prices of those who set the odds and spreads. And read Moneyball for how statistics are used and abused in baseball.
Nowadays with sports betting in reasonable size easy to implement and with significant global capacity, I would expect sports hedge funds to emerge. Before I entered finance I ran my own personal sports betting hedge fund as a teenager. It will be fascinating to observe investor reaction to what, to me, is obvious; making stock picks and sports bets is the SAME underlying investment process. Putting money on the Dallas Mavericks or Tiger Woods is structurally isomorphic to betting on Google GOOG or oil prices.
Develop an informational or analytical edge, be it quant, fundamental or both, make many bets in many areas and arbitrage the emotional and uninformed. Maybe someone will set up a sports hedge fund or would that look uninstitutional? Bet on the stock market or the sports market? BOTH as they offer different sources of return. And sports results do NOT depend on the economy. DIVERSIFICATION of alpha sources is the way to go.
© posted by Veryan Allen on 3.2.06
by Veryan Allen 
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