The Wall Street Journal

December 9, 2004 7:47 p.m. EST

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 After Hitting It Big on Internet, Cuban Is Scoring in Basketball2

Billionaire NBA Owner's Gamble
On a Hedge Fund Faces Long Odds

December 9, 2004 7:47 p.m.

Mark Cuban's proposal to launch a sports-gambling hedge fund is itself a big wager. To succeed, the billionaire owner of the Dallas Mavericks basketball team will have to scour the market for complex bets, while overcoming steep logistical and regulatory hurdles.

Mr. Cuban said last week in a posting on his Web log1 that he planned to launch a gambling fund and expected investors to make money. It was reported -- erroneously, Mr. Cuban says -- that he intended to hire professional gamblers to make smart picks on specific games. Instead, his idea is to place big bets that exploit small discrepancies between bookmakers.

"This isn't about picking the best games to bet on," Mr. Cuban says in an e-mail interview. "This is about an arbitrage between spreads on games across services."

Mr. Cuban's plan boils down to this: Betting terms for the same game often vary between different sports books. For example, one bookmaker takes bets on Team A to win by six or more points, while a different sports book takes bets on Team B to lose by fewer than eight or to win the game. In this example, the hedge fund would place both bets. Most likely, the bets would cancel each other out, though the fund would still be out the commission it paid on both bets. But there is a small chance that Team A will win by exactly seven points, making both bets winners.

Since the probability of winning both bets is small and the size of available sports bets often limited, Mr. Cuban would have to bet on a large volume of games to run a large hedge fund and pay for commissions lost along the way. "This is programmed trading," says Mr. Cuban, similar to strategies used by hedge funds to exploit small discrepancies in commodities prices or foreign exchange rates.

Mr. Cuban will have to overcome big obstacles. Bookmakers might resist taking large gambles from the fund. Also, the legality of the idea in the U.S. is questionable. Most sports gambling -- besides horse racing -- is illegal outside of Nevada, over the phone or online. To counter that, the hedge fund could be located outside the country and place bets overseas. A spokesman for the National Basketball Association says it is reviewing Mr. Cuban's proposed hedge fund, but declined to comment further. The NBA's bylaws prohibit anyone involved in the league, including team owners like Mr. Cuban, from betting on NBA games.

Mr. Cuban has a good business record. He made $1.7 billion by selling his Internet startup to Yahoo Inc. in 1999, and has boosted the fortunes of his NBA club since he bought it in 2000. He says many details of his hedge fund aren't set and a launch is 18 to 24 months away.

The idea isn't entirely new. Several Web sites offer sports-betting arbitrage information. "There are professional gamblers doing exactly what he's talking about, but they're not dressing it up as a hedge fund," says Nick Nocton, a London lawyer who specializes in sports gambling.

Nonetheless, Mr. Cuban's proposal has brought widespread attention to the idea of a sports-gambling hedge fund. Some experts say it could work. "There are differences from time to time, at the margin, that are exploitable," says Raymond Sauer, professor of economics at Clemson University. However, he notes that some sports books might object to taking bets of the size needed to spark growth at a multimillion-dollar hedge fund.

Plus, large bets can shift the odds. "The question is, how much could you actually invest before they start moving these lines?" asks Koleman Strumpf, associate professor of economics at the University of North Carolina and a gambling scholar. He says that successful Vegas sports gamblers who have gone public with their strategies generally look for what they consider good bets, not the kinds of arbitrage opportunities Mr. Cuban plans to chase.

Online -- and outside the U.S. -- big bets are possible. Several billion dollars are bet online each year. "There are very large, very liquid betting opportunities," says Mr. Nocton, the London lawyer. He points to big betting exchanges like Betfair and TradeSports that match up bettors directly, making possible a wider range of odds and point spreads.

Betfair, run by London-based Sporting Exchange Ltd., says it handles up to 12,000 bets a minute. Mark Davies, Betfair's director of communications, says in an e-mail that a sports-gambling hedge fund could work, but Mr. Cuban would have to take some unhedged bets to create sufficient volume. "There's plenty of liquidity, but I don't think you can rely on arbitrage," he says.

Even if Mr. Cuban and the employees he intends to hire work oversees and are able to place their bets, they still face legal questions. It's unclear if U.S. gambling regulators would consider investing in the hedge fund to be equivalent to betting on sports. "You are investing in gambling, so it's probably gambling," says Mark Rasch, an Omaha, Neb., attorney who has advised online casinos. A spokesman for the Department of Justice, which has taken a keen interest in fighting online gambling, declined to comment.

Prof. Sauer says the legal terrain isn't so clear, noting that American investors are free to buy stock in publicly traded U.S. casinos or U.K. sports books that take bets. Frank Catania, a gambling consultant and New Jersey's former director of gaming enforcement, says that as long as the fund is based outside the U.S., "I don't see any regulatory problems here."

A spokesman for the Securities and Exchange Commission declined to comment. The SEC generally doesn't closely regulate hedge funds, which are private investment pools for large investors that often take unorthodox investment strategies, though last week the agency passed a rule that will require most hedge-fund advisers to register.

Enforcing antigambling laws can be tough, but Mr. Cuban may have drawn attention from regulators by announcing his intentions, says I. Nelson Rose, a professor at Whittier Law School in Encino, Calif. Mr. Cuban says he didn't expect so much media coverage: "I didn't send out a press release. I posted an entry on my blog, something I do all the time to get feedback and ideas."

Write to Carl Bialik at carl.bialik@wsj.com3

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