Hedging: A way of reducing your risk when trading sports?
KEY TAKEAWAYS
- Hedging sports can enable you to reduce your risk, but it will also reduce your potential ROI. Therefore it is a tradeoff between risk and reward that you as a trader have to make.
- Be aware of potential pitfalls such as bookmakers voiding your bets as they can leave you exposed with high risk and no upside.
“A hedge is an investment to reduce the risk of adverse price movements in an asset.” — Investopedia
As a sports trader you can reduce your risk by hedging a trade you have placed. For instance on November 30th, 2016, Ural played Rostov in the Russian Premier League. The opening odds for the game offered by Pinnacle is included in the table below. Rostov both being higher placed in the League and being a team that beat Bayern Munich at 15 in odds in the Champions League the week before was the favorite to win the game.
Soft bookmakers typically place their odds lower than the odds offered by the sharp bookmakers such as Pinnacle, because they have a lower payout rate. 2,5 hours before kick-off, November 30th, the Norwegian bookmaker Norsk Tipping (NT) offered the game at 2.95 for a Ural win. However at this point in time the odds at Pinnacle had dropped to 2.17 (removing their 2,5% vig, the true odds would be 2.26) resulting in a 30.5 % edge [ ((2.95 / 2.26) -1) *100% ]. Next, Norsk Tipping most likely noticing a large amount of money placed on a Ural win adjusted their odds to 2.6 resulting in the odds below.
However, this was still a 15% edge versus Pinnacle. I placed the bet at 2.6 on NT with a stake of 850 NOK or approximately 100 USD. If Ural wins I would get a return of 260 USD and a profit of 160 USD (Stake returned — Initial stake). After I had placed my initial bet, I kept monitoring the odds at Pinnacle, which kept dropping. With such a large edge I now had the opportunity to hedge my bet to completely eliminate any potential losses if Ural failed to win, while making a smaller profit if they win. This was achieved by placing a bet on Rostov to win on the Asian Handicap line of +0.5 at Pinnacle at 1.96 in odds about 20 minutes after taking my initial position. Meaning that if the match ended in a draw, Rostov would have a 0.5 goal handicap, the result being a Rostov win. By hedging on Pinnacle I would have a return on investment of 11,7% given a Ural win [ 1 / (1/2.6 + 1/1.96) ]. While breaking even on any other outcome (a draw or a Rostov win), so basically I was freerolling the game without any risk of potential losses. An important point to note is that hedging differs from arbitrage, because the bets take place at different points in time. This enabled me to get a much higher ROI while taking positions on both sides than what I would have achieved through arbitrage at the time I placed my initial bet.
The odds at Pinnacle kept on dropping all the way until kick-off as new information became known to the market. Most likely due to Rostov resting several key players, the pictures below compare the lineup Rostov fielded vs Bayern on the left and Ural on the right.
When the match started Ural had become the favorite and Rostov the underdog. Pinnacle offered the following odds:
The vig-free closing odds offered by Pinnacle at a Ural win would be 1.76 [ 1.71 / 0.973 ]. (You can read more about why the closing line is a good approximation of the true odds of a game here). The closing edge versus my initial trade at 2.6 would have been a 47,7% edge [ ((2.6 / 1.76) -1) * 100%) ]. It is also worth to note that I would have had better odds on my hedge trade if I had placed it closer to kick-off.
The game ended with Ural winning 1–0, giving me a profit of $60. However, if I had simply stuck with my initial trade of a Ural win at 2.6 in odds without hedging I would have made a profit of $160. This highlights the pros and cons of hedging sports. The advantage of hedging was that I managed to eliminate my risk on the game. However, the disadvantage was that I reduced my potential ROI.
Now, because of Norsk Tipping’s specific rules, the Ural — Rostov game was not offered as a single, meaning that I had to match it with another game to form an accumulator. I ended up combining it with another team scoring 2 goals or less in another game at 1.01 in odds. They ended up scoring 2 goals, so it was a close call, that ended with the trade being good. However this also meant that in reality my hedge trade was not completely risk free. If the 1.01 game had not gone in, I would have ended up losing the $100 I placed through Pinnacle. Also, bookmakers often reserve the right to void bets where the odds is wrongly set. This could potentially have left me with a huge -EV trade. So if you are going to hedge your trades, make sure you are familiar with your bookmakers rules and practices.
What did I learn from this experience? One can only make decisions with the information one has available at that point in time. I could not know whether the market would continue dropping in odds on a Ural win after I placed my initial trade or whether it would swing the other way. Therefore I made the decision to hedge my trade and freeroll the game for a guaranteed profit if Ural ended up winning. In hindsight, I would have made the same decision if the trade had been a single on NT. However if I come across trades in the future where there are hedging opportunities, but the game is not offered as a single I would rather run the risk with the potential upside of a larger return on investment
KEY TAKEAWAYS
To sum it up hedging in sports can enable you to reduce your risk, but it will also reduce your potential ROI. Therefore it is a tradeoff between risk and reward that you as a trader have to make. In addition, you should be aware of potential pitfalls such as bookmakers voiding your bets as they can leave you exposed.
For more tips and strategies check out the Trademate blog.
Written by: Marius Norheim, CEO of Trademate Sports
