Sports betting is becoming a mainstream investment opportunity, and one Australian company is at the forefrontMonday, 24 March 2014 06:47
Brendan Poots is the founder and CEO of Priomha Capital, the world’s first fund manager centered on sports and events. The Australian, a keen sportsman himself, has overseen booming returns far in excess of more traditional funds. He spoke with Inside Asian Gaming about the genesis of Priomha, his methods and the future of the market.
IAG: It seems the media has been paying more attention recently to sports betting, both in a positive and negative manner. Is the extra attention affecting Priomha?
Mr Poots: There are two sides to it. Unfortunately, sports betting still struggles with a stigma—it’s dirty, underground, old men with crusty beards smoking cigarettes trying to win $5, but it’s very different to that now. We’re always trying to defend the new side. With advancements in technology and global broadcast rights of sport it is a very different landscape than even 10 years ago. The fact that there’s more happening is raising it in people’s consciousness, which is a positive. Even so, if in the financial markets someone like Madoff has a Ponzi scheme, people brush it off as a one-off and the world still turns, but in sports betting people think that all the time and the industry is disproportionately tainted.
Yes, investors do. We started informally about six years ago with me funding it while I was working. The original investors were interested because of their interest in sports. As part of our transparency, investors can see the bets made on a team or player beforehand, except for any opportunistic in-match betting, for which they get updates—for example, we were giving people updates every day in the first cricket Test between Australia and South Africa. The original investors liked the idea of having their money invested professionally while still being able to “cheer” on a result.
Over the last two years, sentiment has gone from looking for a good bet to looking for a solid return that is uncorrelated to all other global markets. We’re now being seen as a viable alternative to flagging stock portfolios, property, etc. We’re increasingly being seen as a more mainstream alternative investment class, taking bigger investments and being looked at more seriously. I thought originally it’d be just people in our network, now people we’ve never met are investing hundreds of thousands.
What led you to launch Priomha?
I studied chemical engineering, so I had a maths and quantitative background, then after uni I played cricket in England for four years. And I always liked a bet. In county cricket the overseas pro player is always funded by a wealthy person connected to the club. The guy who funded me was a bookie. I worked sometimes in the bookie shop and started seeing the amounts of money laid out on sport. Fast forward to 2007 and I studied at Columbia University in New York—we were taught about trading securities, oil, gas, etc. I got bored of that, mainly because of the underlying asset, but thought that I could use the same principles trading in sport, so toward the end of 2007 I started by trading $20,000 of my own money in sport. In 2009 I was made redundant post-GFC and decided that rather than dusting off my CV and looking for a job in a bad economic climate I’d trade sport full time.
Towards the end of 2009 a conversation with my father changed things irrevocably and convinced me of the merits of a Sports Hedge Fund. I took out a 15-leg sporting multi—I had about $3,000 to win about $40,000. It was the last leg, I’d got the first 14, and the Wallabies (Australian rugby team) were playing Scotland. I was on the Wallabies, and they lost 9-8 after they missed many kicks for goal and played very poorly. It was the first time that Scotland had beaten Australia in almost 30 years! I said to my dad that I’d lost my $3,000, and he said no, you’ve lost $40,000—all you had to do was lay off and you would’ve had it.
The hedge fund was born, and in 2010 I started looking for outside investors who believed in the concept. I applied my skills and knowledge from business school like risk management and portfolio management to sporting markets.
The most important thing needed now in terms of attracting investors is education. The biggest change in the last ten years is in-play betting. Sports betting used to have a binary outcome, now you can take a position every minute in football, every ball in cricket. You can invest during a horse race. Odds fluctuate during a match, so you can trade the curve of a team like trading the curve of gold or a stock. Multis allow you to hedge a lot more. What happened on that cold night in Scotland in November 2009 will never happen again.
How long did it take to develop the initial database?
The first one we built was for horse racing. We started with 20 variables and kept monitoring and adding. You can write programs to scrape data from the Internet, which we outsource to computer science people—the difficulty is deciding which variables matter. For example, in a Test match in cricket, there are factors to be considered like batting first versus second, winning the toss and putting the other side in to bat, etc. All of that needs to be weighted. Data is just a commodity; it’s how you use it that’s important. Every innings, every ball goes into our database and is updated live— player stats as well, like a batsman faced X amount of balls from a right-handed bowler and X from a left-handed bowler. All that is automated, it’s just data extraction. One good thing about sport is there’s so much data. The most time-consuming thing is getting it into a format you can understand and then determining which pieces are worthwhile.
The initial database for any sport takes a couple of months. Thereafter it’s a “living thing”, being forever updated. Developing a predictive algorithm takes longer. Firstly it gets back-tested against previous results, testing hypotheses and variables. Once that’s completed it’s then tested “live” with actual stakes—albeit small. At some point thereafter—12 months or so—it’s then considered ready for primary trading. The algorithms are forever monitored for efficacy and changed when needed. It’s an ongoing process but the insights are what help to identify trading opportunities.
A good example was in the recent first cricket Test between Australia and South Africa at Centurion. (Australian captain) Michael Clarke declared the second innings closed and left South Africa 480+ runs to win (instead of batting on and leaving a bigger target). South Africa went immediately from $44 to $7. We knew Clarke would declare—he’s an attacking captain. We could back South Africa at $44 and lay off at $7. This clearly showed some of the inefficiencies in the sports markets.
The market rated South Africa at $7—a one in seven chance of winning, or alternately a 14% chance. Our model rated South Africa’s probability of winning at less than 0.5%, or in terms of odds $200+. No team had ever scored that many to win, the wicket was very difficult for batting and Mitchell Johnson was bowling well. The latter two points were judgment or intuitive assessments that the model doesn’t assess.
With such a significant edge on the market, we opened a maximum position (3% FUM total exposure) by betting against a South African victory. South Africa were very quickly in trouble, never recovered, lost the match and the trade paid out in full without the need to hedge our position.
We strongly hold a belief in ensuring there’s a human component to trading, because there’s a lot of emotional money—if you can be unemotional there’s money around that is there for the taking. Additionally, as per the recent Test match it’s difficult to model factors such as momentum, or specifically a player’s dominance over others psychologically. In the stock market, if you’re looking to trade momentum you can see momentum in buy or sell orders, but in a sports match you can feel it but not model that element, so it needs a human component. We use 85% statistics and 15% judgment— that’s the target for all sports. It used to be more like 50-50 when we had a less developed database.
How has your performance compared to other quants or hedge funds?
It has blitzed them. Over the last four years we’ve returned +180%. The global hedge fund index since 2010 is up less than 6%, about the same as the Australian stock market. During that time we’ve also had fewer negative months than hedge funds and the ASX. We’ve been steadily going up, despite most people’s preconceived ideas and expectations of the sports betting market. Importantly our volatility is lower than those of our comparative indices. This is a function of in-play trading: you no longer lose 100% of your stake because it’s not a binary outcome anymore—you can get out and lose “only” 30%, not 100%.
Do those high returns necessitate a very high capital churn rate?
We try and turn over the fund once to twice a month—we’re still improving and optimizing that, but of course it’ll depend on opportunities that arise.
Pari-mutuel & exchange betting, of course, is about winning money from other bettors. There are differences of opinion over how well educated casual bettors are. What’s your position?
It depends. Bettors are more educated now because there’s more info available. If you look at big events like the Melbourne Cup, with once a year punters, it’s easy as there’s a lot of uneducated money contributing to the markets. However, most punters bet regularly and are better informed. So they’re more educated, but they’re not necessarily more disciplined or sophisticated. Money management and identifying value are two keys to long-term success. For example, as a casual punter, if you think something can win you’ll back it even at short odds, but a sophisticated or disciplined punter will wait till it gets to its “correct” price. Casuals might bet every race; smarter punters might only have two to three a week.
Stick to your model, be disciplined or you’ll lose money is the idea.
More money is predicted to flow into sports betting in the coming years. Are you noticing more formalized competition because of this?
No, not really. There are lots of syndicates betting. In May 2013, there was a policy push for Vegas to open up to private equity funds as well as individuals. It was knocked back as it was put in too late, but it comes back up for review next year. There’s a growing momentum for sports betting in the US, and I think it’ll open up. Currently a lot of sports betting is under the table as it’s illegal—it’s only legal in a few states. So the government can’t tax it, and they’re looking to legalize it and get a cut. If that happens, US sports—and bettors who love betting on them and overseas sports—will come in, and that’s a US$300 billion a year market.
You have mentioned taking Priomha overseas from its Australian base as one change. How do you expect the company to look in five years?
Yes, and there are a couple of reasons for that. One, Australia was always viewed as the place to trial the business; proof of concept, if you like. It’s also easier financially—it’s home. We’ve proved it works; we’re getting momentum and a track record and now looking to Asia, Europe and North America. It’ll be exactly what we’ve got now but replicated in other regions. We’ll have traders, analysts—who might specialize in one sport—and computer guys doing data. The computer guys may be in one area, but ideally we’ll have four offices and about 15-20 staff including subcontracted specialists.
So it’s quite lean.
Yes. Even hedge funds that have a billion dollars under management may only have five or six key trading or analysis people involved. Again, once the data’s gathered and the algorithms are written, the hardest part is over. A hundred-dollar trade takes the same effort as a million-dollar trade.