Sports Betting July 8, 2010, 11:01AM EST

A League of Their Own

A new London-based hedge fund is making history by betting on sports. And Americans are missing out on the fun

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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.