March 14 (Bloomberg) -- I spent the majority of the 2012 baseball season in Las Vegas betting on baseball games. I wasn’t there on a hedonistic bender or suffering from a midlife crisis. I was running a baseball-centric hedge fund.
After an accident curtailed my 15-year career as an equities trader on Wall Street, I relocated to Las Vegas to run a fund based on a model that used advanced baseball statistics - - known as Sabermetrics -- to bet on games. I came away convinced that if Las Vegas adopted some of the best practices of Wall Street, it could carve out a significant niche in the multitrillion-dollar business of asset management.
A Wall Street firm’s revenue is driven by two factors: the collective assets under management of its customers and, to a lesser extent, the turnover of those assets. Finding ways for customers to attract assets and encouraging them to continually shift their holdings is all there is to it.
Casinos could do both these things in their sports book operations. A large casino could identify customers who hail from financial centers and visit Las Vegas on big sports weekends such as the Super Bowl or the Final Four. It could then invite them to a seminar titled, say, “How to Create Sports-Focused Hedge Funds” and arrange presentations by lawyers, accountants and others who could explain the logistics. In other words: Facilitate the creation of analytics-based hedge funds, and then provide those funds fee-based services.
Look at what happened with poker over the past decade. Unlike every other game on a casino floor, poker doesn’t result in the house playing against the customer. In poker rooms, the casino merely collects rent from players competing against one another. Because that’s a lower-margin business than operating a roulette wheel or craps table, running a poker room looks like a less attractive business. Yet casinos all over Las Vegas tore out slot machines (!) to expand their poker rooms.
Thousands of young, intelligent gamblers -- including Nate Silver, now a New York Times blogger and statistician -- left stable jobs to play poker full time, and a significant percentage moved to Las Vegas to do it. Why? Because they were drawn to a pursuit in which they could make money with their minds through careful analysis and critical reasoning.
Thanks to the rise in sports analytics, sports books now offer the same opportunity for growth and revenue expansion -- only on a much larger scale than poker did a decade ago.
As an investment strategy, what I was doing was more than straightforward gambling. I was pursuing an edge in a mispriced security just like any hedge fund. Only I was finding it in daily shares of a baseball team instead of a listed security. Las Vegas bookmakers post an implied win probability for every team, each game. My model simply did the same -- and, if it found an opportunity, placed an appropriately sized bet, as if I were creating a stock portfolio.
That difference wasn’t trivial, though. In fact, to my investors it was vitally important. They already had investments tied to stocks, bonds, real estate and so on. Private-equity investors, venture capitalists and others who invest in alternative assets search for this every day: a new investment whose return is unrelated to existing holdings.
Poker players typically came to Vegas with a stake in the range of -- to quote Matt Damon’s character in “Rounders” -- “three stacks of high society” (i.e. $30,000). Lured by the attraction of uncorrelated returns, however, my investors looked at model-based betting as an alternative investment asset, and I arrived in Las Vegas with $1 million.
The combination of willing investors, willing participants and an explosion of available data -- at websites such as FanGraphs for baseball, Football Outsiders for the NFL and 82games for professional basketball, among many others -- creates a golden opportunity for bookmakers.
But they will need to make some adjustments to take full advantage of it, and that’s where adopting Wall Street’s best practices comes in.
First, they’ll need to stop worrying about being outsmarted. A trader in charge of biotechnology stocks at even the biggest investment bank has medically credentialed portfolio managers for customers. Although this puts traders at a permanent informational disadvantage, the best ones overcome this by facilitating the buying and selling of large amounts of stock between highly sophisticated customers. Las Vegas has never approached its customers this way. Like Wall Street market makers, casinos should embrace the concept of matching deep-pocketed customer orders rather than trading against them.
Second, based on my experience, casinos need to stop being hostile to large investors. I was needlessly treated like an enemy despite making daily bets totaling more than $1 million a month. No sports book ever proactively asked me about my intentions. An investment bank increases market share on the trading floor by knowing its customers; if a sports book had made any effort to know me, I would have worked with them to place bigger bets.
Finally, analytics-based models like mine don’t all arrive at the same conclusion. As with the poker boom, Las Vegas casinos are going to see more of this new breed of sports gamblers with sophisticated risk-analysis skills backed by professional investors. With a little bit of finesse, the casinos can get them all playing at the same tables. They will then be in a position to match customer orders -- thereby creating the elusive riskless and profitable trade for the bookmaker. They’ll have attracted more assets under management and encouraged more turnover, reaping more income in the process.
So the next time someone accuses Wall Street of looking like a casino, the gambling managers in Las Vegas should sit back and say, “Right -- and we’re doing everything we can to keep it that way.”
(Joe Peta is the author of “Trading Bases: A Story About Wall Street, Gambling, and Baseball” and a former market maker and hedge fund trader. The opinions expressed are his own.)
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