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You are here: Home / Investment News / Horses for courses: sports betting as a new asset class

Horses for courses: sports betting as a new asset class

July 3, 2016

horsesSports betting could become a new asset class, offering uncorrelated returns to a standard pension fund portfolio with potentially better returns than the average hedge fund, according to a UK study.

The study by two quant research managers, Lovjit Thukral and Pedro Vergel Eleuterio, both of Long Rock Capital in London, showed that a relatively simple horse-racing betting strategy could beat a hedge fund returns index as well as the S&P 500 between 2010 and 2016.

The strategy was to consistently ‘lay off’ (betting on the event not to occur) the four favourite horses with the lowest odds in each race.

The study followed earlier work by academics Gomber, Rohr and Schweickert in 2008 who wrote a paper discussing the microstructure of sports betting and how it can develop into an alternative asset class generating alternative alpha.

Another study in the US, by Meers, Waters and Wortman in 2013, sought to do the same using American football.

In the latest study, the authors say that sports betting can fit nicely within Modern Portfolio Theory because of the lack of correlation with markets.

The strategy of betting against the favourites (which is similar to how most bookies make their money) outperformed the Credit Suisse Hedge Fund Index in five out of the six years and the S&P 500 in three out of six years, with a better Sharpe ratio.

“Having only looked at one sport and one type of strategy, we are confident that this is only the tip of the iceberg in terms of the usage of sports to create alpha,” the paper says.

The authors note that they assumed no liquidity issues and don’t take account of commissions and other “trading costs” of the betting system.

 

* Greg Bright is publisher of Investor Strategy News (Australia)

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