Sports results don’t correlate with economic factors unlike stocks, bonds, commodities and currencies. Sports bets also offer reliable arbitrages and consistent mispricings. Diversify PROPERLY with new sources of return. Most people bet on stocks or sports emotionally and their PREDICTABLE behavior allows money to be made out of them.
Invest in DIFFERENT alpha sources NOT beta asset classes. If your portfolio does not have an allocation to SPORTS ALPHA CAPTURE then the portfolio is likely not properly diversified. Efficient market hypothesizers say if I run a 100 meters enough times I’ll random walk it in 8 seconds at some point! The first sub 2 hour marathon could be by you, yes YOU! Good luck betting on such stochastic stupidity. The so-called passive mania depends on EXACTLY THAT.
Skill is rare but DOES exist. I assume passive pimps think Pelé, Babe Ruth, Jack Nicklaus, Michael Jordan, Wayne Gretzky and Don Bradman were just “lucky” like hedge fund managers Jim Simons, George Soros, Warren Buffett, Benjamin Graham and the BEST ever investor Munehisa Honma? Some sportspeople are paid well because they deliver top value. Some funds can charge 2 and 20 because investors DESPERATELY need access to skill. Meanwhile clueless salespeople like Bogle, Fama et al claim skill does not exist! Incredible a few suckers still around that believe them.
Investing is like sport. Few are good enough to play in major leagues. The best become very wealthy, journeymen do not. Those NOT skilled play in minor leagues or work at mutual funds and join private equity firms. Losers 99.99%, winners 0.01%. Working hard to develop competitive edges others don’t have combined with talent and dedication. Sports alpha doesn’t exist just like investment alpha? No such thing as hard work? No skilled people just lucky ones? That’s what the passive crowd want you to think while they collect absurd fees on YOUR money for ZERO work and NO analysis. Lose money? It’s the market’s fault, right?
Passive funds GUARANTEE most of YOUR money gets wasted on losers. Prudent fiduciary(?) John Bogle thinks if I golfed with Jack Nicklaus or played tennis against Roger Federer I had a 50% chance of winning. No-one has skill so it’s a stochastic process! That is the absurd random walk theory behind “passive”. Eugene Fama got a – not yet revoked – PhD, a fake “Nobel” and academic tenure for hypothesizing a 3ft tall person is as likely to slam dunk a basketball as a 7 footer. According to his “academic” ideas even if you weigh 80 lbs he thinks a great career may await you as a sumo wrestler or defensive linebacker. And some fools still wire their savings to him? Don’t Forget Alpha.
How many sports teams would win if managers just randomly chose players? But naive investors are urged to do just that. Skill is necessary to win in any business. Passive pimps 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? Why does financial media report the stock market average but the sports media never insults viewers with “average” golf scores. 100+?
Investors are supposed to be satisfied with the “average” return but you don’t see “average” sportspeople on TV. Could you watch a sport where every amateur 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”. 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?
$7 billion is 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. There is plenty of sports alpha out there, globally.
SOURCE: Hedge fund – Read entire story here.