Bet Hedging Gambling
Experienced bettors use hedging in sports betting to guarantee a profit from the wager or reduce the risks if the wager loses. Hedging a bet involves placing one or more bets on the opposite side of an initial bet, which can be similar to middling a bet. This strategy creates a favorable situation, whether your original bet wins or loses. Hedging is when you essentially find a middle and bet on both sides. This can be done via live betting when and if you fear the outcome may go the other way. It can also be done on the last game of a mutli-contest parlay. In this case, you will bet against yourself to ensure some winnings. Hedge betting is a sports betting strategy that most bettors are at least vaguely aware of. This doesn’t mean that they all fully understand how to use it effectively or that they know why and when they should consider hedging a bet. As a result, the strategy is often used incorrectly or for the wrong reasons. Hedging your bets is a betting strategy which involves placing bets on a different outcome to your original bet to secure a guaranteed profit regardless of the result, or reduce your risk on a market. For example, hedge betting can be applied to reduce your risk when the odds have: Shortened after an initial lay bet. Diversified bet hedging In contrast to conservative bet hedging, diversified bet hedging occurs when individuals lower their expected fitness in a given year while also increasing the variance of survival between offspring. This strategy uses the idea of not 'putting all of your eggs in a basket.'
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As the world of sports betting continues to expand on the strong back of the digital revolution, former finance professionals are taking their skill sets to the sports betting world via hedge bets. Once inconceivable, there are now over 10 sports betting hedge funds in operation around the globe. In this article, we explore some specific funds and reveal some of the methodologies behind them.
What’s a Hedge Fund?
The shortest way to describe a hedge fund is as an alternative investment that uses pooled funds (in a variety of ways) to earn an active return for investors. For our purposes, the hedge funds we discuss are exclusively related to sports betting.
Hedge funds are only available to accredited investors. They are not as regulated as mutual funds, nor other similar, low-risk investment vehicles.
How Does a Sports Betting Hedge Fund Differ?
Officially, sports betting hedge funds refer to themselves as “sports betting entities.” Experts bet with their client’s money using the same principles as mutual funds, except they bet on sports instead of investing in traditional financial instruments.
It’s important to clarify that these hedge funds are not traditional “tipster” companies, nor are they selling picks in any way. Experts make bets on sports with their investor’s money and are in total control of all capital invested in the fund.
Who Started Sports Betting Hedge Funds?
Fundamentally, finance revolves around this same principle. First floated around by Mark Cuban in 2004, sports betting hedge funds eventually took off with Centaur Galileo in 2009. Other firms would follow suit.
Professionals believed that by applying a wider variety of fundamental financial strategies to sports, they could create something truly innovative: a sports betting hedge fund. Sports betting is about predicting future outcomes, and in fact, isn’t really all that different from the stock market.
Why This Is Perfect for Today’s Market
Some of the best and sharpest minds from the world of finance are now in an infinitely more exciting line of work; betting on sports. In the era of record low returns on multiple asset classes (the real and nominal yields on government bonds are currently mostly negative), investors are searching for new, creative investment vehicles. This has led to those with traditional finance backgrounds exploring innovative ways that result in optimal returns.
By retaining skills and practices from traditional financial practice and applying them to sports hedge bets, financial wizards believe they can predict successful events. This is no different than traditional hedge fund purchasing practices.
Bookmakers strive to get equitable action on both sides of a wager. They don’t try to predict a result, and only try to ensure they don’t get exposed to massive losses, leaving tremendous opportunity for bettors. With available features like live betting, hedging bets has never been easier. Just because you place a bet that’s set to fail, it doesn’t mean that you have to lose everything you’ve wagered.
How Does Hedge Fund Sports Betting Work?
Sports betting funds experts assert that successful sports betting is nothing more than a sophisticated mathematical equation. Quantitative analysts (often with PhDs in Mathematics or Physics) combine complex and varied pieces of data with machine learning to create proprietary algorithms. To quants, it’s all data to input. In fact, most have zero interest in sports.
The individuals constructing these systems generally don’t even have too much of an interest in sports; they just build systems for predicting outcomes. To them, it doesn’t matter if its sports or the future of the S&P 500. It’s all just different data to input.
These hedge funds don’t base their bets exclusively on techniques borrowed from finance. They also incorporate traditional methods or – as they call them – “qualitative methods”.
Sports hedge funds employ “watchers” who review games both on television and in person. These individuals gather objective and subjective statistics to feed back to the quants. For individuals employed by these firms, it might mean watching over 10 games a day (across sports) and submitting in-play reports as often as every 10 minutes!
What Is the Process for Reporting Data?
The reported data goes far beyond the ordinary. In soccer, “watchers” will not only report regular statistics (corners, shots, etc.), but they also record anything that – they believe – is related to the final result. These details might include the manager’s mood, to the sentiment of the crowd to the weather. There’s always data to be accumulated at a sporting event.
Firms employ analysts who work with traders to interpret the data and place the sports bets through different books around the globe.
Bet Hedging Definition
Centaur Galileo: An Early Sports Betting Hedge Fund Failure
Centaur Galileo, directly inspired by Mark Cuban, claimed to have a proprietary quantitative model that could make bets that garnered tremendous returns for their investors. They aimed for 15-25% returns, which was an incredibly lofty projection for a (relatively) small firm.
Ultimately, Galileo was too good to be true. It folded in 2012, after losing $2.5 million of investor money. In the press release, they chalked up their dissolution to “sheer bad luck.”
While quite advanced, Centaur Galileo wasn’t quite ready. Overconfident in their system and basing their capital management on unsustainable growth/returns, Centaur likely increased their unit sizes (amount bet per event) more than they should have. This likely led to their dissolution and catastrophic losses for investors.
A Resolute Success: Priomha Capital
Priomha Capital (The Cloney Multi-Sport Investment Fund) is undoubtedly the largest, most successful and most notable of all the sports betting hedge funds. Established in 2009, Priomha invests in sporting events which stretching across different professional leagues. They don’t reveal their methods or the specifics of their bets, but by the end of 2011, the fund generated a staggering 118% return.
To put this in context, the S&P 500/ASX 200 lost 17.4% over the exact same time period. Unlike Centaur, the fund exercises careful risk management procedures and is audited quarterly.
According to Bloomberg, Priomha provided its clients (after the fees they charge) an astonishing 17% ROI from 2010-2015. The fund has returned over 220% since founded in 2009. With such incredible returns and unique methods, Priomha has raised the eyebrows of not only sports bettors, but also fund managers everywhere.
The Real Potential of Sports Betting Hedge Funds
Betting on sports through a hedge fund has a ton of utility for investors. Sports are an uncorrelated asset, recession-proof, and have low volatility. Oh, and they provide massive returns too.
1. It’s Not Correlated to Anything in the Stock Market
Massive political and economic events have been proven to have little-to-no correlation with sporting events. What does this mean? That making bets on sports are the “ultimate uncorrelated asset class.”
Investors looking to diversify their portfolio can do so with sports betting funds. As we’ve already mentioned, it’s possible for sports betting hedge funds to create safety measures and hedges, thanks to the digital revolution in sports betting.
2. Massive Returns
The returns of sports betting funds are impressive, as long as they exercise proper control over their capital. ROI speaks for itself.
3. Recession-Proof
Finance is unbearably complicated these days, and systemic risk in one’s portfolio is a difficult thing to manage. Putting money in a sports betting hedge fund is recession-proof; its impervious to the broader events of global finance.
4. Lower Volatility
Most alternative assets (and the hedge funds that bet on them) have significant volatility. If managed correctly, this shouldn’t apply to sports betting funds. They’re able to generate substantial funds without leverage, and subsequently without the downside risk associated with most alternative funds.
The Future of Hedge Funds May Be in Sports Betting
If you need more proof that sports betting is now 100% legitimate, there is no stronger evidence than multinational money managing companies running viable firms with stringent capital restrictions. With incredible technology at our fingertips, it’s never been easier to place careful, educated sports bets.
The cardinal rule of Betting 101, however, is to always manage your capital successfully. If something is too good to be true, it usually is. This applies to hedge funds as much as it does to the average Joe sports bettor.
Hedge betting is a sports betting strategy that most bettors
are at least vaguely aware of. This doesn’t mean that they all
fully understand how to use it effectively or that they
know why and when they should consider hedging a bet. As a
result, the strategy is often used incorrectly or for the wrong
reasons.
The purpose of this article is to provide some clarity on
exactly what the hedge betting strategy is all about. We’ll
explain the fundamental concept and look at why it’s a strategy
worth considering. We’ll also provide some examples of when it
can be used, and why, and look at its advantages and
disadvantages. We’ll provide some helpful tips for using the
strategy too.
Hedge betting is often confused with arbitrage betting. There are similarities between these two
strategies in that they can both involve betting on all outcomes of the same event, but they are used in
different ways and for different reasons. We’ll briefly cover the difference between the two strategies
in this article, and we’ve also written an article that offers a detailed explanation of how arbitrage
betting works.
The Basics of Hedge Betting
The best way to view hedge betting is to think of it as a
form of insurance. It’s actually a relatively straightforward
strategy at its core, with the basic idea being to protect
existing bets against potential losses. This is done by betting
on outcomes that are different to the original wager. For
example, you could bet on the favorite to win an upcoming
football match having already bet on the underdog to win.
On the face of it this doesn’t seem like a very sensible
thing to do, as betting on both teams to win a football match
will usually result in a guaranteed loss. There are, however,
some situations when hedging a bet makes a great deal of sense.
The strategy can be used to reduce risk that you may no longer
wish to be exposed to, and in certain circumstances can even be
used to guarantee profits.
The Difference Between Hedge Betting and Arbitrage Betting
The primary difference between hedge betting and arbitrage betting is the way in which
the two strategies are used. Arbitrage betting involves placing two or more wagers on
different outcomes simultaneously. It can be used only when a discrepancy between the
odds being offered by different bookmakers creates the right kind of opportunity. Its
purpose is solely to guarantee profits based on that discrepancy.
In contrast, hedge betting involves placing additional wagers on a different outcome
or outcomes subsequent to an original wager being placed. The strategy is usually used
following some kind of change in circumstance. Its purpose, as we’ve already discussed,
is to either reduce risk or guarantee profits.
Why Use Hedge Betting?
Before you think about using the hedge betting strategy, you
should understand why it can be beneficial to do so. We’ve
mentioned how it can be used to reduce risks or guarantee
profits, so let’s explore these two reasons in some more detail.
Hedge Betting to Reduce Risk
Hedge betting to reduce risk typically involves taking a
small guaranteed loss to avoid the possibility of making a
larger loss. There are a few reasons why you might want to do
this, with the most common being that you have placed a wager
and no longer have any confidence in it winning. This can be due
to simply having doubts about why you placed the wager in the
first place, or something could happen to affect your views on
the chances of it winning.
For example, let’s say you placed a $100 point spread wager
on the Tennessee Titans for an upcoming football match against
the Tampa Bay Buccaneers. At some point before the game starts
you have a change of heart about the bet, and no longer want to
be exposed to the potential $100 loss. Maybe the quarterback has
just got injured, or maybe your instinct is telling you that you
made a bad bet in the first place.
Rather than let the bet ride, you could choose to hedge it by
placing a $100 point spread wager on the Buccaneers too.
Assuming the line hasn’t moved, one of the two wagers is
guaranteed to win. You’ll lose a little bit of money as the odds
for both bets will both be just below evens, but your loss will
only be a fraction of the $100 you were originally exposed too.
Hedge Betting to Guarantee Profits
Depending on the types of wagers you place, there may well be
occasions when you can use hedge betting to guarantee profits.
An example could be if you placed a wager on a team to win the
Super Bowl at the start of the season and then that team made it
to the Super Bowl final. You could hedge that wager by placing
another one on the other team to win the Super Bowl. If you got
the math right then you could create a situation where you make
an overall profit regardless of which team wins.
Another example would be if you placed a six team parlay or
accumulator, and the first five teams you backed all won. You
would then stand to make a sizable profit if the sixth team won
too, but stand to make nothing if it didn’t. At this point you
could place another wager on the opposing team to win, and again
you would be able to guarantee an overall profit.
Bet Hedging Theory
Hedge Betting Examples
Now that we’ve explained the basics of hedge betting and why
you might want to use it, we’ll show you a few examples of some
hypothetical scenarios to illustrate exactly how you can use it.
In each of these examples we will be using the decimal odds format. If you’re not
familiar with this format, please take a look at our article where we explain the different
types of odds. We also provide a tool which converts odds into different formats that you
might find useful.
Hedging a Future/Outright Bet
Hedging a futures or outright bet is one of the most common
uses of the hedge betting strategy. The idea here is that, in
the right set of circumstances, you can create a situation where
you are guaranteed to make a profit regardless of whether your
original bet wins or loses.
For the sake of this example let’s say that you’ve placed a
$100 wager on the England soccer team to win the FIFA World Cup,
at odds of 12.00.
Now let’s say that the England team makes it to the final of
the World Cup, where they will be facing Brazil. Your preferred
bookmaker is offering the following odds on which team will lift
the trophy.
As it stands you will make a profit of $1,200 if England wins
the tournament and a loss of $100 if Brazil wins the tournament.
If you are still confident that England will win then you can
just let the bet ride, but you could use hedge betting to make
sure that you will make a profit either way. Let’s say you
decide to cover yourself, and placed a $500 bet on Brazil to
win.
You have now placed a total of $600 in wagers and are
guaranteed to win whatever happens. If Brazil wins you will get
a return of $750, for a total profit of $150. If England wins
you will get a return of $1,300, for a total profit of $700.
Basically you have sacrificed some of your potential profits to
make sure that you cannot lose.
Please note that you can choose how much you stand to profit
on each team winning simply by adjusting the size of the stake
on your second wager. If you staked $300 on Brazil, for example,
your profits would be $50 if Brazil won and $900 if England won.
If you staked $800 on Brazil then your profits would be $300 if
Brazil won and $400 if England won.
Hedging a Parlay/Accumulator
Hedging a parlay or accumulator is another common use of the
hedge betting strategy, and again the idea is to take advantage
of circumstances where it is possible to guarantee some profit.
In this example we’re going to assume that you’ve placed a
six team point spread parlay on the NFL, staking $50 at odds of
41.00.
Now let’s say that the first five teams all win. Your sixth
selection is the Green Bay Packers, and they are playing Chicago
later in the day. At this point you stand to make a profit of
$2,000 if the Packers cover the spread, but a $50 loss if they
don’t. Obviously you can choose to just let the parlay ride, but
you could easily lock in a tidy profit if you wanted.
Because you’re betting on the point spread, the chances are
that a bet on Chicago would be the standard 1.91. A good bet to
make here would be $500 on Chicago.
You have now wagered $550 in total, but you are guaranteed an
overall profit. If Chicago wins your return will be $955 for a
profit of over $400, and if the Packers win you’ll make a profit
of $1,500. As with the example we gave earlier, of hedging a
futures bet, you are essentially just sacrificing some potential
profit to make sure that you definitely come out ahead. Once
again you can choose to adjust the stake of your second wager to
determine how much profit you will make on each outcome.
Hedging Due to a Change in Opinion
Hedging due to a change in opinion is not as common as the
previously mentioned uses of the hedge betting strategy, but
there are times when it can be a sensible action. A large part
of successful sports betting is managing risk effectively, so if
you have a wager in place that you no longer think will win then
reducing your exposure might well be the right thing to do.
For this example we’re going to assume that you’re looking to
place a wager on an upcoming boxing match between Rico Ramos and
Claudio Marrero. The odds at your preferred bookmaker are as
follows.
You like Ramos, so you bet $50 on him to win at 2.50.
However, in the lead up to the fight you feel that Ramos
doesn’t look in his best shape and you change your mind about
his chances of winning. You therefore don’t want to be exposed
to a $50 loss. Seeing as you stand to make a profit $75 if he
does win, you decide to stake that much on Marrero winning.
You now have a total of $125 wagered, which you’ll get back
in full if Ramos wins. If Marrero wins you’ll get back $114.75,
for a loss of $10.25. You can’t make a profit from the fight,
but you’ve minimized your overall risk. The problem is that the
draw is also a possibility, and you’d be exposed to a $125 loss
if this happened. You therefore decide to place a small bet of
$6 on the draw too. This will return $126 in the event of a
draw.
Your total wagered is now $131, with the three possible
outcomes offering the following potential overall returns.
Ramos Wins
$125 returned for $6 loss
Marrero Wins
$114.75 returned for $16.25 loss
Ramos Wins
$126 returned for $5 loss
Obviously this is not an ideal situation to be in, as you
can’t win and are guaranteed to lose. Sometimes it is right to
take a small loss rather than let a bet ride though. In this
example your maximum loss is less than one third of the original
$50 you had at stake, so your overall exposure is reduced.
Hedging In-Play (Example 1)
Most online sports betting sites offer in-play betting these
days. Also known as live betting, this is a feature which allows
you to place wagers on sporting events after they have started.
The hedge betting strategy can be a very useful one to use when
betting in-play, particularly if an event looks like it is going
to turn out different to how you expected.
For this example we’re going to use a tennis match between
Rafa Nadal and Fernando Verdasco. The initial odds at your
preferred bookmaker look like this.
You believe Nadal is going to win the match, so you back him
with a $100 stake.
You decide to watch the match, and after the first few games
it becomes clear to you that Nadal is not at his best. He’s
already had his serve broken, and doesn’t appear to be making
his shots as well as he usually does. At this point you feel
that there’s a very good chance that Verdasco is going to win.
You log back in to your bookmaker and see that the following
odds are now available.
Nadal is still the favorite, but the odds have shifted
somewhat due to Verdasco going for a break up. You decide to
place a $50 bet on Verdasco.
You’ve now wagered a total of $150, with two possible
outcomes.
Nadal Wins
$140 returned for $10 loss
Verdasco Wins
$115 returned for $35 loss
This is another situation that is not ideal due to a
guaranteed loss. However, your overall exposure is significantly
reduced from the original $100. If Nadal turns the match around
and wins then you’ll be $50 worse off than you would have been
if you had let the bet ride, but if Verdasco does go on to win
then you will have saved yourself $65.
Hedging In-Play (Example 2)
You can also use hedge betting in-play to lock in some
profits. Let’s use the same tennis match as above for this
example, and assume that you have again placed a $100 wager on
Nadal to win. After his initial slow start you decide not to
hedge your bet immediately, but instead wait to see how the
first set plays out. Nadal ends up breaking back, and winning
the set on a tie-break. The odds on the match are now as
follows.
Hedging A Bet Meaning
The odds on Nadal have now dropped due to him taking the
first set, and the odds on Verdasco have lengthened. You’re
still not convinced that Nadal is at his best though, and you
think Verdasco might just stage a comeback. You decide to hedge
at this point, by placing a $25 wager on Verdasco.
Your total staked is now $125, with the following two
outcomes a possibility.
Nadal Wins
$140 returned for $15 profit
Bet Hedging Gambling Definition
Verdasco Wins
$150 returned for $25 profit
As you can see, you are now guaranteed to make a profit
whatever happens. You’ve forfeited $25 of your potential profit
should Nadal win, but made sure that you will come out ahead
however the match finishes up. This could be a sensible thing to
do if you had genuine concerns about whether Nadal would see the
match out.
Advantages and Disadvantages of Hedge Betting
The advantages and disadvantages of hedge betting are really
quite straightforward. The main advantage of the strategy is
simply that it can give you a great deal of flexibility in
managing the level of risk you are exposed too. If you are close
to landing a big win from a parlay, for example, you can easily
use hedging to play it safe and ensure that you definitely make
some kind of profit. If you stand to make a loss on a wager, and
no longer want to be exposed to that loss, you can use hedging
to reduce the size of that loss.
This extra flexibility can be very useful
when it comes to
practicing good bankroll management. The main disadvantage of
managing your risk in this way is that it comes at a cost. As
we’ve highlighted in the above examples, reducing your risk
exposure can mean that you are guaranteed to take a loss.
Although you can reduce the size of the potential loss from an
existing wager, you also end up sacrificing the potential profit
from that wager. Using hedging to guarantee profits also has an
associated cost, as you are effectively paying a premium from
your potential profits to cover the other side of your wagers.
Hedge Betting – Our View
There are a lot of conflicting views about how this strategy
should be used, and indeed whether it should be used at all.
Some people believe that you should always let existing bets
ride, and that hedging is a bad strategy that costs money in the
long run. Others believe that it is an excellent strategy that
should be considered at every opportunity.
Our view is somewhere in the middle. We very much believe
that it’s a strategy you should understand, as it can be
extremely useful in the right circumstances. It’s important not
to over use it though, as you can end up being overly cautious
and giving away far too much in potential profits to ever be
profitable overall.
Our Top Tip for Hedging Your Bets
How and when you use the hedge betting strategy is, of
course, entirely up to you. You may decide to use it only in
exceptional circumstances, or you may decide not to use it at
all. You may decide to use it frequently in order to keep your
exposure to risk as low as possible. There is no right and wrong
really, but we do have one tip that we recommend you follow.
The important thing with hedging is to judge each situation
on its own merits. We don’t believe that you should have any
hard and fast rules about when to hedge and when not to hedge.
Each time you are in a situation where hedging is worth
considering, you should weigh out the pros and cons and make
your decision accordingly. Basically you need to make sure that
you are hedging for the right reasons, and these reasons will
ultimately depend on your attitude to risk.
Hedge Betting Using Betting Exchanges
The rise of betting exchanges has opened up a number of additional
opportunities for using the hedge betting strategy, due to the fact
exchanges allow you to lay outcomes as well as back them. We haven’t
covered this aspect of hedging here as we are aware that not everyone
uses betting exchanges, and some of you may not even be familiar with
how they work.
We do provide a detailed guide to using betting exchanges though.
This explains exactly how they work, and also features a great deal of
additional strategy advice specific to exchange betting.