Game On: Hedge Fund Bets on Sports

Like many day traders, Tony Woodhams sits at his desk and takes positions that can result in multi-million dollar swings. He uses intricate data, speedy technology and years of experience to make sober, educated decisions.

The only catch is that unlike most traders, Woodhams isn’t taking positions in stocks, options, futures or even currencies. He’s not scrutinizing the latest policy statements out of the Federal Reserve nor the newest reports on the state of the global recovery.

That’s because Woodhams is weaving in and out of positions in the sports betting marketplace, investing millions of dollars on who will win the latest Wimbledon match, whether or not Tiger Woods makes the cut at the British Open and which team will be winning at the half in the World Cup final.

As a managing director at U.K. hedge fund Centaur, which last month launched the Galileo Managed Sports Fund, Woodhams is at the front lines of the world’s first regulated sports exchange-traded fund.

Just don’t call it gambling.

“What we do is no different than what your stock broker does,” said Woodhams, who traded derivatives before joining Centaur. “His job is to analyze stocks and recommend buy, sell or hold strategies for clients. What we’re doing is exactly the same process, but the only difference is  we’re analyzing sports probabilities.”

Galileo’s goal is to take advantage of inefficiencies in the sports betting marketplace by using the latest technology and preying on the tendency to bet with your heart, not your brain.

“We’re far more passionate about sport on this planet than we are about a lot of other things,” said Woodhams. “If you are a sports bettor and you don’t follow a very clinical process, it’s very difficult for you to not make mistakes and not push prices.”

So how does it work?

Galileo takes positions through Betfair, the biggest online sports betting exchange in the world, which says it manages more than 15 times more transaction a day than the New York Stock Exchange (NYSE:NYX) and London Stock Exchange combined.

Unlike in typical bets in casinos or through traditional gambling sites, Betfair matches buyers and sellers – just like in stock market exchanges – meaning these aren’t all-or-nothing positions. Instead, Woodhams said 90% of the time he sells his position before the match is even over.

For example, Woodhams said if his analysis shows a strong likelihood for the Dallas Cowboys to take an early lead against the New York Jets, he would buy a position before the game for the Cowboys to win. However, rather than hold that position like an everyday bettor, he would sell as soon as the Cowboys took an early lead for a profit, sometimes worth hundreds of thousands or millions of dollars. The scenario  is similar to what day traders do in buying and selling stocks, say in the hours or days surrounding an Apple (NASDAQ:AAPL) earnings announcement.

“It’s almost like editing a film. We’re splicing a section of the match and trading around that section of the match,” said Woodhams.

And like most hedge funds, Galileo leverages its money, which magnifies potential winnings and losses. Galileo takes positions on everything from who will win a given match and the over/under on the number of total points scored to what the final score will be.

“We’ve effectively created our own asset class,” said Woodhams.

Galileo had less than 20 founding investors, who got in at a minimum of $150,000 a piece. But Woodhams said the fund aims to grow its assets under management to $100 million over the next two years and is targeting a rate of return of 15% to 25%. For those returns, Centaur is charging a 3% management fee and a 30% performance fee on the gains.

“If they have found a way to take advantage of the inefficiencies of the sports betting world, then there is probably an extreme opportunity there because it’s not a heavily regulated business,” said Jason Weisberg, a NYSE floor trader and senior vice president of Seaport Securities. “Once things become regulated it becomes a lot more difficult to take advantage because regulation is accompanied by transparency.”

The Galileo fund has some big-name backers as the Royal Bank of Scotland (NYSE:RBS) is its depository to hold client money, Grant Thorton is its administrator and Deloitte serves as the fund’s auditors. By receiving the green light from the Gibraltar Financial Services Commission, the equivalent of the U.K.’s Financial Services Authority, Galileo became the first licensed sports betting fund.

Of course, there are some questions about the risk involved in gambling on sports and running into a series of upsets or bad beats, especially with leveraged money.

“My gut feeling is that at some point they’re going to have a run that goes down,” said Jim Lackritz, a professor at San Diego State University who has studied sports gambling. “I’m wondering what happens if all of suddenly they lose six of eight and you have your investors going absolutely bonkers. If it was that easy to beat the sports markets, then people would have been doing this years ago.”

And as pioneers in this field, Galileo clearly doesn’t have the track record that mainstream hedge funds have.

To make big returns, Galileo is focusing on taking advantage of price disparities that are often caused by emotionally-driven fans. For example, Woodhams said the price for tennis star Andy Murray to win Wimbledon is typically pushed 5% to 7% higher than where the stats suggest it should be due to the fact that “hundreds of thousands of English sports patriots bet because they want him to win it.” Galileo would use its sober analysis to take capitalize on the disparity.

“The most successful traders and sports bettors are the ones that have the ability to remove emotion from the equation,” said Weisberg.

Woodhams says he believes other hedge funds will follow in Galileo’s footsteps by trading in these sports exchanges.

“The only reason investment banks aren’t entering this is snobbery. They believe this is not a real market,” said Woodhams. “This is not some reckless pursuit. This is a very clinical process. There is a lot of intelligence and experience that goes into doing what we do. There is a lot of opportunity in these markets.”

In fact, Woodhams said Centaur has received interest from sports clubs and sponsors asking it to provide insurance premiums as a way to hedge against financial risks associated with teams’ successes or failures. For now, Centaur is focusing on simply trading in these sports exchanges.

“God bless them if they figure out how to do it. I imagine it will change the face of sports gambling -- especially in Europe. It could be a game-changer,” said Weisberg.