We believe that Betmarkets is a great investment for already diversified portfolios. The advantage our experts have against the market – the Market Edge – gives them a great headstart towards a positive performance. Additionally, one also needs to consider their Skill to obtain a good prediction of the portfolio’s performance. There might be a survivorship bias in the selections. However, there’s a great degree of confidence in their ability to surpass a certain threshold of performance. Our portfolio is a great source of diversification and yield. Always take into account that you should consider it as a risky investment.
What makes Betmarkets a good investment?
This post was written in response to a few insightful questions from Nuno Rocha Borges, Msc Hons Finance from FEP-U.Porto, regarding some information included in our March monthly report. If you haven’t done so already, it might be good to take a look at:
Adjusting returns for inflation
That is an adjustment that is not being done as of now. All returns are displayed as they are, no annualizations whatsoever in the monthly report. That is a correction that is only meaningful in long-term comparison and for prospective analysis (when computing expected returns). Post-comparison will need to be done with real – as opposed to nominal – returns, of course. In this day and age, it is debatable as to how significant inflation is for the returns in the developed world. However, it needs to be considered regardless.
Market Edge and portfolio performance
Going now to the other discussion around Market Edge and playing the long-term game. Let’s start by putting things a little bit mathematically. In betting, there’s a distinction that does not occur in the finance world. Your “investment” – at least how we define it – does not equal your “capital”. Here, your capital is the amount you place as your bankroll. Your investment is the amount you place on bets. Furthermore, we call (betting) turnover – t – to the ratio between them (investment/capital). It is not uncommon to have t>100% for any given month.
Return on Investment
We have ROI as the return on the amount you invested in bets. ROC is the return on the capital you have allocated. It follows that, in betting, ROC = t * ROI. All figures gross. We can also define ROI = – Spread + Market Edge + Skill + Error. Furthermore, you cannot measure the Skill (our alpha) previously – only conduct regression analysis to estimate its coefficient – and E[Error]=0.
Net Market Edge
In order to compare the contribution of the Market Edge (deducted from the 1.7-2.0% spread of the houses we work with; let’s call it the Net Market Edge) to the overall profitability of the portfolio, one must multiply it by t on a given period. Otherwise, the comparison is made against ROI.
Under a Net Market Edge of 0.55% (around current data: 2.41%-1.85% from the interval of spread) and a monthly turnover of 70% (around current data: 70.3%), our portfolio can grab 12*70%*0.55% = 4.62% annually from this factor alone. This would put us below the lines of the S&P500 long-term performance. We are also ignoring the impact of inflation, as previously stated. However, we still then need to add Skill to this equation.
We think it is fair to assume that someone who conducts this activity professionally won’t have a negative Skill coefficient. Additionally, the p-value of their extensive track records rejects H0: “This track record could be obtained by chance alone” at the 95%-level. Most of them also observe so at the 99%-level. We believe that the most correct guess would be to place a positive coefficient in this factor.
Expected Annual Return
What we want to say is that our E[annual ROC] = 4.62% + 12*t*Skill, and that the Skill level has been estimated from the track records as frankly positive. Our current ROI sits at 1.83%, which would put the Skill contribution to around 1.28%. Our expected annual would then be 12*70%*1.83% = 15.37% (E[Error]=0), while exhibiting a volatility of 12.25% – inflated from the early days of the portfolio when we only had a handful of experts. We expect to be able to reduce it to the 7-9% range, simply by adding more experts.
A note here regarding the survivorship bias that affects decisions of this kind. The selected experts available in Betmarkets were among the best performers previously. This is not a guarantee that they will be the best performers looking into the future. Plus, some non-performers were forced to leave the market, so we cannot even observe the full sample of experts, as we should. Statistics continue to play a part everywhere we look. However, we make the call that these experts have all the characteristics and the experience required to have a good shot in overcoming a certain level of performance that we deem as a threshold.
Nothing is a “long-term for sure gain”, of course but we can be certain of one thing. IF the experts manage to maintain a positive Net Market Edge, they will tend to gain in the long-term.
Focusing now on volatility. The profiles of different experts differ in this aspect, of course. Generally, we can say that replicating the bets of one expert is indeed more volatile than investing in one single stock. However, we are talking about building a portfolio of experts. This is a significant twist to this story – and that’s where our value proposition lies!
Stocks are inherently correlated (some of them in the 0.8-0.9 range) while our experts are completely independent from each other. It’s a no-brainer on why Apple share price might be correlated with the one from Samsung. Why would the performance of a south American football expert be correlated with the one of a Nordic ice hockey expert? In our correlation matrix between the 25 experts, only 15 pairs (out of 600) exhibit a coefficient not in the range -0.1-0.1. Those can be disregarded as noise. Henceforth, replicating several experts simultaneously can significantly reduce the volatility of this set of investments. All without forfeiting potential returns!
Escalating this fact to a different perspective, a portfolio of these experts – like ours – is also independent from the equity markets as well. I would enlarge this claim to all other financial markets, but I’m yet to test this hypothesis. Our 5-years daily Betas against the S&P500, the STOXX600 and the MSCI World Index are 0.07, 0.01 and -0.11, respectively. We can confidently assert that our Beta against these indices is 0.
All this turns our portfolio into a great source of diversification and yield. I don’t see it acting in replacement of the fixed income segment of a diversified portfolio. I’m not a fan of bonds, but they have a part to play for more mature investors whose present value of future income is smaller in comparison to their current wealth. I see an investment in our portfolio working as a complement to them. Don’t get me wrong, we are acting in an unregulated market. Even if statistics tell you that this product has a great risk/return profile, I’d rather have you considering this as a very risky investment. Thus, you should only allocate a small part of your portfolio to it.
Liquidity is an issue that I don’t put a big emphasis on in this asset. The only thing that is not liquid in this investment is the money you might have stranded in pending bets at any given time. We are ignoring friction such as the time required to withdraw/deposit money from online payment gateways, external to our service. Everything else is part of your bankroll and acts as a buffer against the risk of ruin from losing streaks. However, the amount being bet (In-play) should only account for 2-5% of your entire bankroll, even in busy days. This will also depend on the profile of the experts you follow, of course. Everything else you deposit is withdrawable as soon as you want to.
Hope this sheds some light in some of your doubts! If you are yet to register, feel free to do so while using the code BM252 to receive a €20 bonus. You can invest it in our platform during our Beta version. No deposit required, upon the end of this version this bonus is taken out of the account. You get to keep all profits as credits towards future experts’ fees (eventual losses are all on us).