1. Bet Hedging Theory
2. Bet Hedging Strategy

Betting: Is it smart to hedge? February 26, 2021, 7:34 PM Jared Quay, Preston Johnson & Matt Moore of the Action Network discuss whether it is smart to hedge or middle a bet.

In sports betting, hedging a bet means betting both sides of a game to safe guard against a loss.

Let’s say at the start of the American football season you put $1,000 on an 8 to 1 shot winning the Super Bowl. They eventually make the Super Bowl as the favorites. The night of the game their opponent is 2 to 1. If you now bet $3,000 on their opponent (this being the hedge bet) you are guaranteed $5,000 profit no matter which team wins.

Another example is having 5% of your bankroll on a 1 to 5 favorite. The game doesn’t start well, and you end up using in-play betting to lock in a 1% loss. In this case by hedging you surrendered 1% of your bankroll to safe guard the 4% that was previously at risk.

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. Simply put, hedging is all about using risk management to limit your exposure. Whether in gambling or in market speculation of any kind, hedging is a strategy designed to limit or to offset the probability of losses from fluctuations in prices. There are many ways to hedge your bets, but it basically involves taking opposing positions in a market. Hedge betting is a betting strategy that takes advantage of fluctuations in betting odds to establish an opportunity for profitable betting. As betting odds fluctuate, it is possible to back a team at higher odds then bet against them with a lay bet when odds change. That way, if your team wins or loses, you will profit regardless. Hedging in sports betting is often much more nuanced than just a simple calculator. But particularly when live betting, you can lock in profits when the odds have shifted in your favor. To use our hedging calculator, simply add the price of your pre-game bet under “My Odds” and the bet amount. Then add the current price under “Hedge Odds” and the calculator will automatically calculate how much you need to bet.

The above scenarios are reasonable for even professional bettors to find themselves in. In this article I provide the math for calculating hedge stakes, and also discuss when it is strategically correct to do so. First, I cover another frequent hedging scenario that is almost exclusive to novice bettors. As this is a very common mistake I go into detail explaining it.

Hedging Parlay Bets

As a moderator of one betting forum, and a long time regular posters on others, I often see posts that are along the lines of:

“I bet $100 on a 6 team parlay (accumulator) that pays 45/1. The first five teams have won and the other is playing tonight. Should I bet their opponent at -110 to lock in a guaranteed win? If so for how much?”

It is very common for recreational bettors to add an additional team to their parlays with the intention of hedging it back should it get that far. If you are someone who does this, please read closely.

Understand that a parlay bet is nothing more than rolling a stake plus win forward again and again. Let’s look how it works on $100 using 6 bets with American odds -110.

– Bet1: $100 to win $90.91 – if win you have $190.91
– Bet2: $190.91 to win $173.55– if win you have $364.46
– Bet3: $364.46 to win $331.33 – if win you have $695.79
– Bet4: $695.79 to win $632.54 –if win you have $1,328.33
– Bet5: $1,328.33 to win $1,207.57 –if win you have $2,535.91
– Bet6: $2,535.91 to win $2,305.37 – if win you have $4,841.27

If you win all 6 you have 48.41 times you stake. As 1 was your stake this means the payout is 47.41 to 1 which in American odds is +4741. At Bovada, 5Dimes, and Bookmaker this is exactly what a 6 teamer pays when all point spreads are -110. However, there are other sites that essentially cheat players by using fixed odds. Examples include BetOnline who pays 45/1 and Topbet 40/1 on 6-teamers. This is legit as each has these payouts built it into their rules, but it is this way only to take advantage of novice bettors that don’t know any better. www.bovada.lv is a much better choice.

So, the first mistake was likely getting +4500 when +4741 was available. But, even if you had the full pay ($100 to win $4,741.27), let’s look what happens when you hedge. In order to lock it in so the profit is the same no matter which team wins you’ll now need to stake $2,535.90 on their opponent winning at American odds -110.

This gives two bets. These are:

– Bet 1 = $100 to win $4741.27
– Bet 2 = $ 2,535.90 to win $2,305.36

If Bet 1 wins, on the winning bet you get +$4741.27 and -$2535.90 on the losing one = +$2,205.37
If Bet 2 wins you get +$2305.36 on the winning one and -$100 on the losing one = +$2,205.36

Aside from the penny that can’t be split, you’ve now hedged in such a way the profit is the same regardless of which team wins. Now here’s the kicker. Go back up to where I showed manually rolling forward stake plus win and note: ”Bet5: $1,328.33 to win $1,207.57 –if win you have $2,535.91”. Do you see what a huge mistake adding extra teams to parlays only to hedge is?

If you had bet a 5-team parlay $100 turns to $2,535.91 when all 5 win. By adding a sixth team and then hedging it back, instead those same five teams winning gives you a return of only $2,205.36. That is $330.55 thrown away for no reasons at all.

Please note that even when dealing with moneyline parlays where each has different odds the result is the same. It doesn’t matter the order or anything else. The parlay payout is the same as rolling over stake plus win on each bet, no matter what odds you select.

If you’re in this scenario now, then perhaps you should hedge. This is covered in the next section. Just hopefully this section has resulted in lesson learned and you will avoid getting into the same situation in the future.

When Does Hedging Make Sense

Anytime the stakes involved are significant a hedge is ideal. There is a lot of poor advice on forums that explain otherwise by stressing the importance of expected value. This is where understanding Kelly Criterion helps. In that article, in laymen terms I explain the importance of maximizing expected growth (EG) over expected value (EV). This is also how advanced bettors should determine their hedge stakes. That aside, here are some general bullet points.

When to Hedge:

1) When the second wager is also +EV
This can happen for a variety of reasons. Perhaps you found an arbitrage situation and are betting both simultaneously. Perhaps, you’re watching television and see a player is injured and can act in those few seconds before the in-play betting odds adjust.

2) When hedging was a consideration before you placed your original bet
There are countless reasons to make over-bets. Perhaps you see a line of -6.5 in a football match and strongly suspect it will move to -7, but probably won’t move to -6. Here you might over-bet with the plan to buy it back later for a profit or for a +EV middle attempt. There are many other scenarios with future bets, live trading on betting exchanges, etc. where hedging was a known option at the time the original bet was placed.

3) Anytime you’re overexposed
Again, this can be from foolishly adding additional teams to parlays. It might also be because an outside circumstance required you to reduce your bankroll while bets were pending. It could also be that an arbitrage or over-bet situation that went bad.

As you can see hedging is not the cardinal sin that it is often made out to be. The times you should avoid hedging is when the stakes are within your normal bet sizing (unless with no regard to your initial bet, on its own, the other side becomes +EV). The bad reputation hedging gets is somewhat deserved, because people put themselves into hedge scenarios for the wrong reason. Betting a team to win Super Bowl instead of conference, or division. Blindly over betting large favorites and cutting losses, adding more teams to parlays etc. If you avoid these and do it right, again, it does often make sense to hedge your bets.

How to Calculate a Hedge Stakes?

This is all simple algebra. Let’s say you have $100 staked on +800. The $100 is sunk, it is already in the pot so to speak. If the bet wins you get back that $100 stake, and you get the $800 winnings too, for a $900 return. Calculating hedge stakes is always based on the return. Let’s now say the other side is -465. The question is: how much do we need to bet on -465 for stake plus win to equal the same $900 return?

Most sports bettors are aware (and if you’re not please read: How Sports Betting Works) that when American odds are negative you can calculate the payout on any stake by dropping the negative sign, moving decimal over 2 places, and then dividing it by stake. For example $100 staked on -465 is $100/4.65=$21.51. Therefore $100 on bet -465 is risk $100 to win $21.51. Okay so our hedge stake equation is going to include the 4.65 for the -465 and is going to include the $900 return. Ordering this is pretty simple. That equation is:

STAKE+(STAKE/4.65)=$900

The math to solve that is simple, but if you’re presently void of grade 6 algebra skills, use an algebra.com calculator to solve that. Call stake A and format the equation as A+A/4.65=900. Using that algebra.com link, you’ll see A (stake)= $740.71. This gives us two bets.

– Bet 1 = $100 to win $800 (that’s a $900 return).
– Bet 2 = $740.71 to win 159.29 (that’s also a $900 return).

No matter which side wins we get $900 back. All together we’ve staked $100 on bet 1 + $740.71 on bet 2 for a total of $840.71. So no matter which team wins we now profit $900-$840.71=$59.29. We’ve hedged our bet in full.

Hedging 3 Way Lines

Hedging wagers with 3 or more options to bet is no different. Let’s say for a soccer match the odds are:

Home: +129
Draw: +258
Away: +229

We bet $2,000 on +129 as we calculated a huge edge. Then we find out we made a mistake. There are star players out, and now is breaking news other players are going to rest too. We decide we want off this position in a hurry. How do we hedge? Well our first bet was $2,000 to win $2,580. The return is therefore $4,580. To hedge we need to bet the amount that has stake plus win total $4,580 on each of the other options.

In this case where dealing with positive American odds so payouts calculate as stake+(stake*odds)=payout. Note: odds are the American odds with decimal moved over 2 places.

On +258 our equation is:
A+(A*2.58)=4580
Which solves to A (stake) = 1279.33

On +229 our equation is:
A+(A*2.29)=4580
Which solves to A (stake) = 1392.10

We now have 3 bets.

– Bet 1 = Risk $2,000 to win $2,580 (that’s a return of $4,580)
– Bet 2 = Risk $1,279.33 to win 3300.67 (that’s also a return of $4,580)
– Bet 3 = Risk $1,392.10 to win 3187.91 (that’s a return of $4,580.01)

Add the risks amounts of each (2,000+1,279.33+1392.10) and see we have 4671.43 at risk. We get back $4,580 no matter which team wins. As $4,580-4671.43=-91.43 we can see we’ve now hedged off the $2,000 we once had at risk, and are taking a $91.43 loss no matter if home wins, away wins, or it is a draw.

There are many calculators that can be found searching Google that will do the math for you in calculating a hedge stake. For more advanced users you can find spread sheets for using Excel solver. As this article is in our beginners section, the purpose here was to just give a solid introduction to sports betting hedge bets.

Author: Jim Griffin

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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.

Bet Hedging Theory

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.

Centaur Galileo: An Early Sports Betting Hedge Fund Failure

Bet Hedging Strategy

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.