It is not the first time that I discuss sports betting because while most users are doing so as a lobby, others are taking it as something much more serious. We recently wrote about diversification in a dividend portfolio and we certainly believe in the benefits of diversifying a portfolio. That being said, once a certain level of wealth is reached, diversification from the stock market in general is often necessary or recommended. There are many alternatives each with its own characteristics, here are some of those:
-residential real estate
-commercial real estate
-owning individual businesses
But there also seems to be growing interest towards non market trading. We had mentioned event trading in the past but right now sports betting seems to have all the momentum. Sports and financial markets are a lot more similar than you could imagine and opportunities that are much more difficult to capture in financial markets might still be there on exchanges such as Betfair.
BusinessWeek recently did a profile about one such fund, Centaur Galileo, a London based fund that invests its assets into sports betting.
For years, many investors have been analyzing investing psychology in sports betting because it is stunningly similar to what we experience in the financial markets. Think about it.. When you buy Microsoft shares, you are betting on the short to long tern outperformance of the company compared to its peers. If you were to put money on the Indianapolis Colts to win the Super Bowl game (to be played in 2011), you could close out that bet once your trade objective or stop loss has been reached. If all games had a 50/50 chance of going either way, you could basically generate a solid return by getting 11/20 bets right. That is what Galileo is betting it can do.
The managers are former hedge fund managers who believe the best opportunities right now are in sports betting. And that might be because even more than in the markets, sports betting money is mostly invested through emotive betting, fans that “hope” their team can win it. Any hedge fund manager would tell you there is nothing better than trading against investors that trade based on their passion rather than the facts.
In the financial markets, millions of traders look at movements by the second to profit from short term mismatches. The same can be done in sports betting when investing in live events which are even more volatile than most financial assets.
Longer term investing
Betting on the next world cup, the next Super Bowl or the next Olympics is a longer term investment that could be considered similar to buy and hold investing. While you cannot hold that position for decades, you would still see the value of that position move as the team you bet on makes moves on and off the field.
Like in the financial markets, tons and tons of data about the bid & ask and actual trades is available which makes it possible to find patterns and develop models. That is exactly what Galileo is doing with is five traders and four analysts.
You might think that there is a liquidity problem for a fund like Galileo which is looking to raise 50$ millions to start off. Not true according to Betfair as gambling revenues are expected to reach $528 billions by 2015!!! Through platforms like betfair, tens of thousands can be bet on a single tennis match or golf tournament without having major effects on the market making it possible for large funds like Galileo to operate efficiently.
Illegal in the US
Unfortunately, laws in the United States from 1961 (Interstate Wire act) and 1992 (Professional & Amateur Sports Protection Act) have made online gambling basically illegal and prompted industry leaders such as Betfair to ban US residents from using its platform. Rumor is that those will eventually be reversed because:
-The ban was ruled illegal by the WTO in 2005
-It could bring important tax revenues to state and federal governments
I don’t think I need to argue this one for too long, the correlation between sports events results and the stock markets would be close to 0 so this type of investment would be very good for any portfolio if the returns can meet expectations. Business Week reported that Galileo posted a 8.58% return during the first 3 weeks of this year’s World Cup. Can it keep things up?
Now the big question, would you invest in a sports betting fund? I would…!