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Tony Woodhams gets annoyed when people suggest he's a gambler. "What you saw happening on Wall Street the past few years—that was gambling," says Woodhams, the managing director of an upstart London-based hedge fund, Galileo, that partakes in exactly the sorts of activities many would consider gambling. Every week, Galileo bets on thousands of sports games. According to Woodhams, however, his hedge fund is merely acting like any other, "spreading out the risk and only wagering on matches where we feel we have a competitive advantage."
The Galileo Managed Sports Fund, which launched in April under the umbrella of the nine-year-old Centaur Group, is the world's first sports-betting hedge fund. The idea has been knocking around for a while. Six years ago, Mark Cuban, the billionaire owner of the National Basketball Assn.'s Dallas Mavericks, proposed a similar fund, only to see his idea crash on the shoals of American prohibitionism. While the NBA forbids anyone involved with the league from betting on its games, there was a larger problem: Outside of Nevada, Delaware, and Oregon, betting on sports is largely illegal.
Woodhams is still a ways from raising his target of €50 million, which he is procuring from individuals, with a minimum buy in of €100,000. (Woodhams says Galileo had around 20 founding investors, none of them American.) Yet if he can even come close to delivering his Soros-like hopes for the fund—15 percent to 25 percent returns after fees—Galileo will surely not be the last of its kind.
After two decades trading derivatives, Woodhams, 40, isn't looking to attract sports lovers. He wants investors seeking to diversify their portfolio. "It's been a tough two years for investors. Their stocks are down, their property values are down," he says. "But sports betting isn't tied to the markets. People are always betting on sports!"
A casual fan, Woodhams says that when he watches sports now he feels like Neo in The Matrix, seeing numbers and betting possibilities emanate from the screen. Woodhams believes such bets are safer than investing in the financial markets because of the volatility of the latter and the factors that influence the former. "I was talking to a hedge fund manager the other day," he says. "He was talking about his approach to the markets, which was clinical. Then he told me after a long day he'll bet on some games, and it's all emotion. It's as though he's a schoolboy betting on his favorite team."
Galileo's edge, Woodhams says, is investing on sports lines without emotion—through proprietary computer models. While he won't divulge specifics, in essence Galileo does what professional gamblers, or "sharps," do: It looks for contests where emotions move the lines. For example, in the NCAA basketball tournament, casual bettors tend to favor teams with storied histories—such as Duke and North Carolina. Sharps can also learn more about a second-division German soccer team or an Ivy League basketball squad than the line setters. However, whereas sharps might personally scout such teams, Galileo relies on public information, including match statistics and news reports. "I can't think of a better job than sitting in an office watching sports and making money from it," says Tony Hargraves, who oversees Galileo's traders. Five years ago, Hargraves was making $10 an hour as a courier. Now he's making $400 an hour, by his own estimation, as a sports trader.
Galileo enters every "trade" only after declaring the odds under which it will pull out. Since betting odds change throughout the course of a game based on the score or a team's momentum—much like a stock price during trading hours—Galileo's employees preordain when to either walk away or cut their losses. (There are no penalties for exiting a trade.) For example, after betting against a draw result (not counting extra time or penalty kicks, which create separate markets) in the recent World Cup contest between England and Germany, Galileo successfully pulled out of the trade soon after Germany went up 2-0. So far, so good: According to Hargraves, the fund's winnings during the first 19 days of the World Cup increased its coffers by 8.58 percent.
Galileo employs five traders and four analysts—all of whom have some financial background—to identify profit opportunities in sports betting markets. Which is to say they bet on soccer, tennis, golf, cricket, and rugby. The gambling outlet where Galileo places its bets welcomes the fund's money. "For us to succeed, we need liquidity," says Robin Marks, head of media for London-based Betfair, the world's largest Internet betting exchange.
That shouldn't be a problem. Global gambling revenue is expected to reach $144 billion by 2011, according to PricewaterhouseCoopers. Merrill Lynch (BAC) predicts that by 2015, online gambling alone could become a $528 billion-a-year industry. Woodhams believes the U.S.—where bettors wager with bookies and overseas Internet exchanges—is bound to change its policy to profit from this trend. "America's a betting country, and it's only a matter of time," he says.
Such logic seems optimistic. The 1961 Interstate Wire Act, which forbade wagering using "a wire communication facility," and the 1992 Professional & Amateur Sports Protection Act (PASPA), which banned sports betting outside the few states where it was already well established, have effectively rendered the notion impossible. A sports-gambling hedge fund in, say, Las Vegas, would have trouble gaining approval from the Securities & Exchange Commission. Any other hope may have expired when, last month, the White House allowed the Unlawful Internet Gambling Enforcement Act (UIGEA) to take effect. Recent bills introduced by Representatives Barney Frank (D-Mass.) and Jim McDermott (D-Wash.) to legalize and tax the online gambling industry apply only to poker. Says Steve Adamske, a spokesman for Frank's Financial Services Committee: "If you try to legalize sports gambling, it's not going to pass."
In America, gambling's negative impact on sports—from the 1919 Chicago Black Sox to Pete Rose to the 2007 indictment of NBA referee Tim Donaghy for betting on games he officiated—has left psychic scars. It's one reason why no major professional sports team has planted roots in Las Vegas. Bill Bradley, the NBA Hall of Famer and former New Jersey senator who sponsored PASPA, echoes the concerns of many when he says, "I don't think we should be turning players into roulette chips."
Still, some in the business argue that betting on sports can purify the games. In 2007, Betfair, which cooperates with the world's sports bodies to uncover fixing, flagged a tennis match between world No. 4 Nikolay Davydenko and No. 87 Martin Vassallo Arguello. Even after Davydenko won the first set, money poured in on Arguello. When Davydenko retired from the match with a foot injury, Betfair suspended payouts and reported the irregularity to the Association of Tennis Professionals. "All we do is report it," Marks says. "It's up to the sporting bodies themselves what they do with the information." The ATP eventually cleared both players of any wrongdoing.
As a private fund, Galileo is less concerned with cleaning up sports than with making money. Woodhams hopes to soon gain American investors, too, and he still believes he'll get approval from the SEC. Maybe he has a point. After the financial meltdown, when millions lost their savings and pensions to mind-boggling financial transactions, Galileo at least presents an idea Main Street can wrap its head around—that Rafael Nadal's forehand may be a safer investment than a mortgage-backed security.
According to Tony Hargraves, who overseas the traders at Galileo, the firm profited from investments in the following contests
June 27: England vs. Germany (World Cup) - Biased home support for the English side made the bet against a draw (11-to-5 odds) extremely favorable. According to Galileo, after two German goals in the first half, the odds grew to 11 to 2 and Galileo exited the trade with a profit.
June 28: Brazil vs. Chile (World Cup) - Based on statistics indicating Brazil's prowess against teams with styles similar to Chile's, Galileo entered in a bet against a draw result (odds: 7 to 2). After Brazil scored two goals and the odds of a draw drifted much higher, the trade was successfully exited.
June 30: England vs. Australia (cricket) - Focusing on England's and Australia's batting-order habits, Galileo backed Australia to win at 2-to-5 odds. After Australia's perfect bat, the odds for Australia moved downward to 1 to 4, and Galileo walked away.