Why you should care
Sports mutual funds and innovative peer-to-peer betting exchanges are offering a whole new asset class.
When sports betting mutual funds the Nevada Sports Investment Group and Contrarian Investments had complaints filed against them in September 2018 by the Securities and Exchange Commission for allegedly violating federal securities laws by taking on unaccredited investors, it appeared to be a setback for a nascent industry. It was only two years earlier, in 2016, when more than a dozen sports betting mutual funds popped up in Nevada following the industry’s legalization there through the state’s Senate Bill 443 the previous year.
But the funds’ run-in with the SEC was merely a blip for a larger industry that’s emerging in the form of new investment platforms and tools that are turning to sports gambling as a viable financial market for their clients across the country. These firms include both hedge-fund-like entities that are picking betting lines instead of having a fund manager invest in stocks, as well as a growing number of innovative peer-to-peer betting exchanges, which pit bettors against one another for an agreed upon price and line, as they would in day trading.
The Supreme Court’s decision last year to overturn the Professional and Amateur Sports Protection Act has also helped boost this budding industry. Many of the firms view the greater scrutiny of regulators like the SEC — such as the action against the Nevada Sports Investment Group and Contrarian Investments, which resulted in settlements — as a way to show that their business is legitimate, even though gambling professionals still regard them with skepticism.
I do see this type of trading as the next asset class, where people will be able to diversify their portfolios.
Alexander Kane, co-founder, Sporttrade
Mutual funds such as 6S Alternatives target not just Americans but also global investors looking to diversify their portfolios. And while most active betting exchanges such as Smarkets are not operational inside the U.S. for now, American startups such as Sporttrade, BallStreet Trading and Fanvest Wagering Exchange are offering “day trading” platforms that allow users to “trade sports predictions” with one another. None of these firms existed before 2015, and each plans to evolve into a platform where users are putting their own dollars up against one another.
Unlike a traditional bet placed with a bookie or casino, where a consumer is locked into their bet until the end of a game, users in these peer-to-peer exchanges can buy and sell their bets mid-game at updated odds, which fluctuate with a team’s win probability. This allows users to sell high for the right price or try to mitigate their losses with an underperforming asset. The hope is that a less risk-averse approach to sports wagering will appeal to fans who are wary of gambling, similar to users who enjoy the stock market thanks to easy-to-use investment apps, such as Robinhood or even Acorns, which give users the change to invest small amounts of capital for little to no fees. These sports mutual funds and day trading platforms are looking to tap into a $60 billion sports gambling market in the U.S.
“Sports betting, just like options trading, is kind of a closed system,” says Sporttrade co-founder Alexander Kane. “I do see this type of trading as the next asset class, where people will be able to diversify their portfolios and expose 1 to 2 percent of their net worth.”
The sports mutual funds — like their traditional financial counterparts — deal with more-long-term investors who are often looking for a newer, more diverse set of investment avenues for their money. “We’ve taken on investors, and we basically use proprietary data and algorithms to wager and try to generate returns for them, as well as for ourselves,” says Duane Cousins, owner and founder of 6S Alternatives.
But the peer-to-peer exchanges are growing too. In early 2018, Sporttrade launched a free-to-play app. Starting with the PGA’s 2019 Masters Tournament, it will offer real prize money for its users to win, and by the end of the year, its plan is to be a fully operational betting exchange in New Jersey.
In their own ways, BallStreet Trading and Fanvest Wagering Exchange are also turning traditional gambling lines or future bets into purchasable shares, which can then be bought and sold as the value of each share changes during a game or season. “I came up with a way to logically translate an NFL team’s performance or team’s value based on data into something kind of like a sports derivative or a per share value,” says John Culver, founder of Fanvest Wagering Exchange.
If any of these betting exchanges are able to attract a large user base, it could have significant implications on the betting world. Exchanges generally offer much smaller fees compared with traditional sportsbooks, which in turn creates larger margins for the casual bettor (or investor) and the mutual fund manager to turn a profit. An exchange also largely eliminates the operator’s risk, because they’re no longer putting up their own capital.
Success isn’t guaranteed. Many of the first wave of Nevada sports mutual funds folded after promising unrealistic returns. And for betting exchanges, how soon they can build the large pool of bettors they need may depend on how the industry is regulated and how professional sports leagues adapt to innovation. It won’t be easy, at least not as long as the Wire Act prohibits bets from being placed across state lines.
Kane says he could see the U.S. courts providing a resolution to this issue as early as 2020, potentially by clarifying the provision within the Wire Act that says that there’s “safe harbor” for wagering information passed from one state where gambling is legal to another, or by abolishing the act altogether. “The moment … you allow interstate gambling, I think you could see 10 to 20 exchanges pop up by the end of 2021,” he says.
Longtime professional gamblers like Jack Andrews are skeptical that change can, or should, come that fast. Like with sports equity wagering, Andrews believes proper checks and balances are needed to prevent the recreational bettor from getting scammed. He also says that no matter how user-friendly and simplistic peer-to-peer platforms are, there is still going to be a learning curve, which can scare off inexperienced gamblers.
But even given his skepticism, Andrews is still hopeful about the future. “I’m actually optimistic about the chance of having exchanges and that the public can be educated in a way that makes this a level playing field,” he says. “I’m optimistic that there are new innovations beyond what Nevada tried to do.” For him — and for many other Americans — it’ll boil down to how those innovations are implemented.