To Hedge or Not to Hedge

The great professional gambler Phil Bull once famously said that the “only good bet was a hedged bet”. There is a lot of truth to this statement and one that we will explore right here and now within this article.

When you place a bet on the outcome of a race for example then you are doing so with more risk. For example if you place one hundred dollars on a certain horse to win and that horse loses then you lose the entire one hundred dollars.

The worst case scenario is one that really hurts and is when your horse was in serious contention but then loses in a close photo finish. Gamblers that hedge are no different to betting firms that look to balance a book. Let us look a bit more closely at how the betting firms operate and that of a bookmaker.

We will look at a very extreme example of one punter wanting to place one hundred thousand pounds onto the result of a horse race and the horse was 3/1.

What is The Liability to The Bookmaker?

If this horse won then the liability would be extreme for the bookmaker. He clearly does not want to turn away that sort of action as liquidity is the mainstay of a bookmaker’s ability to make money.

However he doesn’t want to risk losing three hundred grand either and would much rather hedge the money and make around ten per cent profit on the total.

If the bookmaker was only taking minimal bets on the other horses in the race then clearly he has a very unbalanced book. If another bookmaker was offering say 7/2 on the same horse then he can simply take 90k and back the horse with another betting firm at 7/2.

If the horse wins then he pays out 300k to the punter but gains 315k from the other bookie making 15k. If it loses then he makes 100k from the punter but loses 90k to the bookmaker thus making 10k if it loses and 15k if it wins.

Do You Really Want to be a Punter?

This is the essence of bookmaking and as a punter then you should be trying to do the same thing. If you look to punt on the outcomes of sporting events then you need nerves of steel and a huge bankroll to be able to withstand the losing runs that will undoubtedly happen.

This is why hedging is important and if after doing your analysis you make a bet of one hundred pound on a horse at 4/1 and that horse drops to 2/1 in running or even before the race even starts then you have a chance to make some serious money without risk.

The only downside is that by doing so then you never capture the entire 4/1 when it wins. So let us say that this horse wins one time in four because your 4/1 was value.

If you let the horse run and win then you make four hundred pound once and lose three hundred pound with the three losing bets for a hundred pound profit. However if you hedge with enough frequency at the right price then you can make the same profit or more but without incurring the one hundred pound losses.