Disappointed with your hedge fund returns? Take a gamble on a (very) alternative asset class, researchers have suggested.
Sports betting can serve as a source of uncorrelated excess returns, according to research analysts at UK hedge fund Long Rock Capital. Lovjit Thukral and Pedro Vergel Eleuterio found that systematic investments in betting strategies can outperform both hedge fund managers and the S&P 500, while also providing diversification.
“Sports trading can provide an attractive option to investors as an alternative asset to generate excess returns which are uncorrelated to their existing portfolio,” they wrote in a paper published earlier this month.
According to Thukral and Eleuterio, sports betting fits perfectly into modern portfolio theory, as sports events “in theory have no impact on the financial markets.”
For the study, the researchers modeled a simple strategy of betting on UK horse racing 2010 to January 2016 using historical data from online bookmaker Betfair Exchange. The strategy consisted of ‘laying’—betting against an event occurring—the four horses most favored to win in each race.
Returns topped the S&P 500 on average over the last six years, as well as the Credit Suisse Hedge Fund Index. But volatility was extreme. Annual performance peaked in 2013 at 34%, when hedge funds gained 10% and US equities returned 31%. It bottomed out at negative 7% in 2015—when hedge funds returned 0% and the S&P 500 earned 1%.
“This shows the potential of sports betting strategies as an alternative investment and a unique way of gaining uncorrelated exposure to the market,” Thukral and Eleuterio wrote.
Although the researchers only looked at one sport and one type of strategy, they said they were “confident that this is only the tip of the iceberg” in using sports for alpha.
Related: The Difficult of Being Right Twice