Entity sports betting is being touted as a viable, legitimate investment by some outfits that supposedly operate on the same principles as mutual funds.
These outfits assert that a sports wager is nothing more than a math problem. So they employ quants and utilize machine learning to enhance their ability to make winning bets. Essentially, financial trading strategies are being injected into sports wagering. This means sports betting is portraying itself as a fund that places bets on sporting events, i.e. a gambling hedge fund.
Take, for example, Priomha Capital, an Australian hedge fund that bets on tennis matches, golf tournaments, cricket matches, horse racing and English Premier League soccer. The company utilizes computer models to place bets. According to Bloomberg, Priomha provided its clients with a 17% return on investment over a six-year period, 2010 to 2015. Priomha recently moved to Gibraltar so it could avoid the cumbersome regulations enforced by Australia, which limited it to fewer than twenty investors.
The problem with such hedge fund investing is threefold: First, the fund manager takes 1% to 3% for making the wager; second, the fund gets a vig of 30%, which means the investor receives only 70%; third, there are limitations on the size of bets. Most bookies are not going to accept a $1 million wager. So the funds tend to place their bets in Asia, which is catching on and imposing regulations that include wager size and computer-aided betting.
Then there's the issue of legality. In November 2016, the SEC issued subpoenas to three entities in Nevada engaged in sports wagering. Right now, the only Nevada sports book designated capable of taking bets from such entities is CG Technology, which has an iffy history when it comes to sports betting. CG Technology was fined $1.5 million for various violations by the Nevada Gaming Commission. Subsequent to that fine, CG Technology came to an agreement with the Gaming Commission. CG Technology was implicated in money laundering and illicit gambling. The Commission imposed a $22.5 million fine.
The big problem facing the funds is that they emulate legitimate financial funds, but are not exposed to any type of regulations. Basically, anything goes.
The subpoenas issued by the SEC are all-encompassing, asking for: IP addresses, site names, web hosts and content of the funds; information about the income, net worth and investment experience of investors; all written communications, including text messages and emails; all documents sent to and received from investors.
This is not investing by any stretch of the imagination. Just because a company refers to itself as a hedge fund doesn't mean it is. In this case, it's just gambling on steroids, using computer models to try and beat the odds. Investors should avoid entity sports betting hedge funds. Not only is it risky and probably illegal, but a 30% brokerage fee is insane.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.