Why I Don't Hedge

There are better ways than hedging to mitigate risk

I was reading my timeline on Twitter and saw people posting graphs of epic wins on ESPN Bet. These accounts were well-known live arbitrage accounts - so they also indicated that they were up more on ESPN Bet than they were up overall.

Wait what…?

Yes - if they didn’t play at any other book besides ESPN Bet, they would have made more money than they did. They were losing money taking the other side on mainly Caesars and FanDuel.

They are paying Caesars and FanDuel to de-risk. That’s fine - maybe that’s the only way they feel comfortable playing rn, and playing is worth a ton to them because they are making A LOT of money. Get the money - that’s motto #1.

My goal in this piece of writing is to show a few alternative ways to de-risk (will be exclusively outside the box) that some of these grinders can implement to keep a few extra dollars.

How I think about risk:

A quick example of how I think about risk:

Say you are about to bet on a coin flip with a guy you don't know. Then someone else comes up to you and tells you “That coin is weighted, it will always land on heads”. 

What do you do? Let’s say you have a bankroll of $100 and were going to be $1 - now do you bet more? 

Probably not - you have no clue who the fuck this guy is.

But now let’s say this guy is your trusted friend who makes a lot of money flipping coins. Do you bet more than $1?

Yeah I would

And now let’s say your friend explains he saw this guy w/ the weighted coin flip 100 heads in a row last week (and he recognizes the coin).

Probably bet even more!

In these situations, you are presented with the same fair value (heads 100%). But intuitively we can understand that each situation presents a different level of "risk" and probably demands a different bet size.

Okay, so I think we can all see how the same fair value does not demand the same amount risked. This newsletter isn’t about how to size your bets - it’s about how to de-risk. And how did we de-risk in the above example? Two very effective ways:

Discuss with smart people

When the random person turns into our coin-flipping genius friend - we feel comfortable taking more risk. Let’s go back to the ESPN Bet example. If some of those live arbitrage crushers started to discuss where they were making and losing money - and everyone seemed to think they were mainly earning from ESPN Bet, it should make you more willing to not hedge the CZR & FD side.

You can greatly decrease your risk by having a smart circle of people you discuss ideas with. The risk that ESPN Bet is the “sharp” side goes down with each person that confirms what you are seeing in your results. And that’s the true risk to taking one side of an arb - the risk of taking the sharp side instead of the square side.

Of course, your results fluctuate more when you take one side, but your big risk is betting a -EV strat without knowing it. That’s what arbitrage betting mainly protects people from.

Craft a hypothesis

When our coin-flipping genius friend explains “why” he thinks that this coin is weighted to heads, we become even more comfortable. It’s because we have a hypothesis that makes sense - and the data back up (he saw the results of the coin flips).

Without a why, you will feel lost. It doesn’t mean you can’t win without a “why” - I just don’t think you can size up effectively without knowing why you are.

This goes back to the tried and true advice of defining your edge. I always recommend doing it, because if you can’t explain why you have an edge - it’s hard to believe in it.

In the ESPN Bet situation, the hypothesis is easy but requires some past industry knowledge. ESPN Bet is a rebrand of Penn Gaming - a historically soft sports betting operator. Caesars and FanDuel are two operators who have started to separate themselves as the US operators most tolerant of sharp action.

To take sharp action you have to:

1. Know what to do with it
2. Feel somewhat confident in your trading / pricing

So before even seeing the results - I would believe CZR & FD are more likely to be “sharp” than ESPN. Then the data confirm this - seems like a clear edge to me.

Hopefully, that helped give you a new perspective on risk (and how to mitigate it)

My most recent podcast with Spanky sparked this idea for me - check it out below and please subscribe to my YouTube channel while you’re at it!