Hedge funds try to promote sports betting as an asset class

WHEN he was 12, Warwick Bartlett bought “100 Famous Greyhound Systems”, a guide for betting on dog races. After spending a year tracking every stratagem and picking the best two, he went to the races to take his first punts. He lost. Mr Bartlett, now the boss of GBGC, a betting consultancy, says it taught him a good lesson: “A system can win for a period of time. And then it’s had its day.”

Two trading companies are trying to prove him wrong. Melbourne-based Priomha Capital, which claims to be the “world’s premier sports hedge fund”, wagers on European football, cricket and golf. Founded in 2010, the firm manages about $20m. Stratagem, a rival based in Britain that styles itself as a technology business, wants to raise $25m from rich individuals.

Both argue that techniques imported from the investment world can help turn sports betting into an alternative asset class. By crunching data, they analyse the pricing of odds to identify profitable trades, just as an investment firm would do to pick stocks.

It sounds appealing. Brendan Poots, Priomha’s founder, points out that political and economic shocks have little bearing on sports events, making bets on them the “ultimate uncorrelated asset class”. Sports results should also be recession-proof. And spread-betting—where punters can buy or sell a given outcome—allows punters to hedge their risks, which Priomha does for more than 95% of its trades.

But sceptics abound. Galileo, a sports hedge fund launched in 2010, folded in 2012 after losing $2.5m. Critics contend that sports trading markets are far less liquid than financial ones. Adam Kucharski, a London-based mathematician, says that in only a few markets are gamblers safe from the risk of placing big bets that will move the odds against themselves.

A more fundamental problem is that bookmakers are also spending lavishly to develop predictive models; many have dedicated units of quantitative traders. The hedge funds’ confidence that they can consistently beat the house seems misplaced.

The funds argue, however, that bookmakers can be wrong: many lost money on English football when Leicester won the Premier League in 2016, against initial odds of 5000-to-1. They also point out that the large number of casual betters punting on big events can skew the odds. In those cases, the bookmaker’s interest may not be to forecast the result, but to minimise its risk by attracting bets on a low-probability outcome. And bookmakers sometimes disagree, which they do more since the rise of “in-play” betting (on, say, single tennis points or a range of match statistics). This option also enables a fund manager to adjust his initial exposure over time. “You can get it wrong without blowing up the house,” says Mr Poots.

Priomha’s longest-running fund posted a 10.1% return—before fees—in its latest financial year, a period during which an index of global hedge funds compiled by Hedge Fund Research fell by 5.7%. As it hones its algorithms, Priomha hopes for returns of 17% in the medium term—ie, close to the targets aimed for by private-equity investors. Even an insider, however, concedes it is “probably too early” to persuade institutional investors, a risk-averse bunch, to go to the races, let alone the dogs.