How profitable is laying horse races? How about compared to the S&P 500 and hedge funds?

How profitable is laying horse races?  Lovjit Thukral and  Pedro Vergel Eleuterio, both quantitative research analysts from the UK, have studied this and published their results on June 13th, 2016.

Lay Betting (laying) is the option on sports betting exchanges where users can play the role of a traditional bookmaker, offering odds to sell a bet instead of the usual odds to back a bet.

“I bet you won’t get a bullseye”; “I bet you won’t finish all that”; “They’ll never win if he plays.”

We all make statements like this to friends every day. What you’re actually doing is ‘laying a bet‘: betting something won’t happen.

They used  historical Betfair data ranging from 1st January 2010 to 7th January 2016 and created the following trading strategy: “we invest a certain proportion of our portfolio (1%) laying the 4 horses which have the lowest starting odds. So if we invest 1% we would allocate 0.25% laying each horse. After each horse race we realize our profit/loss and reinvest our new capital and then again invest 1% of our new capital in laying the 4 favorites in the next horse race. In our back-test over 6 years we traded in a total of 57000 horse races, with a total of 228,000 bets places.”

This  simple strategy of laying the favorites consistently in horse races in the UK achieved excess returns with low volatility, as can be seen in the graph below:

It can be noticed that in these 6 years, this strategy has outperformed both the Credit Suisse Hedge fund Index and the S&P 500. Even better, the returns were uncorrelated with these indexes. This shows the potential of bet laying based strategies as an alternative investment and a unique way of gaining uncorrelated exposure to the market.

Awesome, right?

Don’t quit your job though, unless you’re going to prepare for this thoroughly. If you want to make a similar type of investment, you’ll have to take these HUGE factors into consideration:

  • Liquidity. To be honest it is quite low because of the legislation from the last few years and Betfair’s bad public image.
  • The cost of the software that you’d be running (software that has to interact with the Betfair API and take care of the actual bets).
  • Your time (it might seem that it requires a low amount of time because the software would take care of everything; it’s not true because your initial analysis and decision making process would take weeks to complete and it is required even before contracting the software; if you’re going to do this, contact me and I’ll put you in touch with good developers who have done this before – software development related to sports betting and bet laying automation).
  • The hardware costs.
  • Tradings costs (you pay a certain amount on each win, initially 5% at Betfair)
  • Betfair’s nonsensical rake: they take 60% of every big winner’s profit. And if you’d be doing this, you’d be a big winner, otherwise it’s not even worth the hassle.

All these factors were not taken into consideration in the study that I mentioned. Am I missing something? Please post below, in the comment section.

You might also want to take a look over an article that I wrote a while ago, The Best Exchanges. If you’re interested in a similar strategy, you should consider not doing it through the thieving Betfair.

If you’re coming from /r/investing, you’ll probably also be interested in what I consider to be the best investments, besides certain cryptocurrencies: buyout funds.

If you’re coming from sports betting related subreddits, you’ll probably be interested in the best current bookmakers because when it comes to shitty scamsites, there hardly a worse category than this one and you need to be careful.

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