Sports Hedge Fund

From Veryan Allen's Hedge Fund Blog comes this piece on sports investing. Some incorrect generalisations, but an interesting read:

Sports hedge fund? Unlike stocks, bonds, real estate and commodities, sports results do not depend on economic factors. Sports bets offer arbitrages and mis-pricings like "efficient" markets. Find alpha in stocks, bonds, commodities, currencies or sports? They offer different sources of performance so ALL OF THEM. Diversification of uncorrelated returns is the way to go. Focus on building return streams.

Michael Jordan, Wayne Gretzky, Babe Ruth, Pele and the greatest sportsperson ever, Donald Bradman, were just lucky flukes like hedge fund managers Jim Simons, George Soros, Warren Buffett, Jesse Livermore and Munehisa Homma? Buy every stock because it's "impossible" to find good stocks in advance. There are no good sports people just lucky ones? No such thing as talent and dedication?

Any pension fund not investing in sports is breaching fiduciary responsibilities. How many teams would win if managers just randomly chose players from the phone book? Skill is necessary to win in any business. Passive fans say there is no such thing as investment skill! There's no sporting ability as well? Selectors, coaches and scouts waste time because sports talent is just luck? Investing is like sports; having competitive edges others don't have.

Name a sports team that won by picking anyone off the street. Index funds do that and GUARANTEE most of your money gets tied up in losers. John Bogle thinks if I golf with Tiger Woods or play tennis against Roger Federer I have a 50% chance of winning. That is the absurd random walk theory behind "passive". Eugene Fama theorizes a 5ft tall person is as likely to slam dunk a basketball as a 7 footer. Even if you weigh a 100lbs a great career may await you as a sumo wrestler or defensive linebacker!

Investors are supposed to be satisfied with the "average" return of index funds but you don't see "average" sportspeople on TV. Could you watch a sport where every amateur player competes? Media ratings would not be good just like the poor returns of holding "every" stock.

Unlike the sports media, the financial media focuses on market "averages" despite their irrelevance. Imagine Wimbledon including every owner of a tennis racket. Most matches would end 6-0, 6-0, 6-0 but would it change the tournament winner? Efficient market hypothesizers say if I run 100 meters enough times I'll randomly walk it in 9 seconds at some point! The first sub 2 hour marathon could be by you. Good luck betting on stochastic stupidity.

$7 billion will be bet on the Super Bowl, almost all without thorough systematic analysis. Larger amounts will be bet on the soccer World Cup. The favorite is usually overpriced in most sports.

Another anomaly, among many, is geographic bias. Many gamblers favor the team whose name they geographically most closely identify with, even when the owners, players, coaches and managers have no such locational origination. Those who invest or gamble based on emotion or patriotism are likely to lose money over time. Amazing how many throw money at teams from "their" city or country regardless of the odds. It is nice to arbitrage them though.

Curious the contrast of how unhedged betting on equity or credit markets 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 the losers is even better. Sports offer no beta, just like stocks(!), but there is plenty of absolute return available if you know what you are doing. You won't always be correct of course but all that is required is a small forecasting advantage. The odds reflect the crowd's perception of winning probability NOT the actual probability. Variant perception - the crowd must lose over time to those with more information and sophisticated analytics.

Sports produce a vast array of statistics, which with the right tools can be datamined for PREDICTIVE information. Take horse racing. I know quants who have taken serious money (USD 100 million+) out of only 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.

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 managed a private sports betting hedge fund. It will be fascinating to observe investor reaction to what, to me, has always been clear; making stock picks and sports bets is the SAME underlying investment process. Putting money on the Dallas Mavericks or Real Madrid is structurally isomorphic to betting on stock or bond prices.

Whether stocks or sports, it is a skilled quantitative and fundamental evaluation that enables accurate bets to be made after elimination of institutional rigidity and local or national biases.

Develop an informational or analytical edge, make bets in many areas and arbitrage the emotional sports betting crowd. Maybe someone will set up a sports betting hedge fund. There is plenty of alpha out there, globally.