A League of Their Own

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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.

PLAYING THE FIELD

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.

Wachter is a reporter for Bloomberg News.

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