While hedge funds are widely known investment vehicles, sports betting entities that bet their client’s money for returns that can even beat the stock market are less known. However, given an almost decade-long era of low interest rates the search for optimal returns on investment is leading many trades to consider sports betting as an attractive addition to their portfolio.
We spoke to an insider within the niche business of a sports betting hedge fund to understand how they operate and the practicalities of maintaining an edge trading sports.
Question: What is a sports hedge fund?
Answer: Sports hedge funds are companies that bet on sports markets for a profit, treating them exactly the same as traditional asset classes like shares or currencies. Most of the traders within the company have no interest or practical understanding of sports, (we have previously written about this as the Green lumber effect) but what they do know is how to build algorithms to trade sports betting markets and run them on to generate profit.
Question: Can you provide an example of how they get an edge?
Answer: They leave no stone unturned in gathering insight. For example they employ teams of ‘watchers’ to gather both objective and subjective live match data. This literally involves watching soccer matches every day and submitting in-play reports every ten minutes. Apart from key data such as corners and half-chances, they also watch out for any factor that could affect the result; weather conditions, the manager’s mood, the reactions of the crowd.
Sports hedge funds operate on word of mouth and contacts and have a small but very significant investor pool.
Question: What is the hierachy?
Answer: There are four main departments. The watchers are feeding in the live data. The analysts work along with the traders on analysing the incoming data and placing the bets. And at the very top are the quants – the model builders. As with Wall Street or London’s Square Mile, these guys have PhDs in mathematics or physics. They rarely have any interest in sports. Their focus is building smart enough algorithms to maintain an edge and make the company profits.
Question: How was the working environment like?
Answer: I was sitting in an open office with no more than 25 people. It was a quiet environment, full of monitors. Everybody was plugged into their headphones. Making or losing a couple of million on a game was just the order of the day.
Question: Who can invest money in Sports Hedge Funds?
Answer: Sports hedge funds don’t operate a counter service or run traditional marketing campaigns. They operate on word of mouth and contacts and typically have a small but very significant investor pool. When you invest so heavily in building an edge, you have to spend an equal amount of energy protecting your methods and deciding who joins the investment pool.