BOOK REVIEW: Trading Bases by Joe Peta (Sports as an Asset Class)

March 19, 2013 in public

I love this book. It is somewhat curious, because as Seth Rogen said in Knocked Up, “I don’t even like baseball”.

First-time author, Joe Peta says this is a story about Wall Street, gambling and baseball, not necessarily in that order. What he doesn’t say, but the reader finds out is that this is a personal story. How he moved out of his hometown and discovered himself. What baseball meant to him as a kid. How rekindling that fire helped him recover from a nasty accident.

Peta puts enough out there to allow us to make a personal connection with him. Those carefully spread out crown jewels make you chuckle, as when he explains how a well-intended memo got out of control, or tear up, when he talks about how you never know something you do with your kids is the last time you do it or how taking his daughter to the ballpark was an extraordinary bonding experience.

To be clear, it would have been a fine book in the absence of these personal tales. True - it may have been a little hard to penetrate for the person who doesn’t care about baseball especially if he also didn’t care about the convergence of sports and finance, but it would have still been good work. But the personal connection makes it better, much better, and elevates the book from respectable to “I can’t wait for my commute/lunch break/bedtime to read a few more pages” status.

And of course, we do care a lot about the convergence of sports and finance around here.

Just One Question - Why Give It Away?

The overarching story is finding an alternative investment vehicle in sports. Peta credentializes himself, but like any successful sales person, he does so without pushing the envelope. He is very likable, somebody you would want to have a few beers with. However, the sportsbooks may not share that view. Applying the tools he mastered during his Wall Street career, and riding on sabermetric advances, Joe developed a baseball betting strategy and amassed a 41% return in one season.

He doesn’t answer one question that almost immediately popped in my head, a question I’m sure most readers will struggle with. Why give it away? The ultimate test for anybody who claims they can beat the market is “Great, can you manage my money?” If they are confident in their strategies they should. At the same time, they would not give it away. Finding an edge is hard enough. If you are lucky enough to have found one, you wouldn’t give it away and help others to figure it out faster than they otherwise would.

I do not doubt Peta’s claim that he found an edge. He goes to great lengths to explain it and it is conceivable that the sabermetric community has a leg on bookmakers. This is not a random relationship that can be found in any big dataset, such as the “Stocks that start with the letter “a” will beat the market” type non-sense. This appears to be a real edge, which Peta carefully documents in his book. So why does he not keep it to himself?

There are various answers. First, there is the location issue.  It could be that he is not willing to relocate to Vegas, technically the only place where he can place the bets. True, he can do it from anywhere, but he would take a risk with potential prosecution. The government, through legislative history as well as its actions signaled that it is not interested in going after the casual bettor. Operators are the real target. However, running a “sports hedge fund” would make him visible eventually, and he would cross the bridge, at least in perception, from casual bettor to operator.  An even bigger risk that his off-shore operator may disappear overnight if the U.S. government goes after it, which would kill the fund. Forget it. The only way to do it is to go to Vegas. The relocation issue aside, there would also be hesitance on the demand side due to potential legal issues. What is the legal treatment of someone from another state “investing” in a Vegas-based fund?

There is another possibility. It is clear that writing a book has benefits. Does Peta think that the revenues from the book and other opportunities from an increased visibility, not to mention the personal satisfaction from being an author, would be higher than the opportunity cost of keeping to himself? It’s plausible. Maybe he thinks that with the sabermetric advances, the edge would have been short-lived anyway. If that is the case, the opportunity cost of giving it away would be low. Maybe it is better to take the one-time gains and leverage that experience into a book, speaking gigs, and who knows, a movie? (Don’t be surprised if somebody picks up the movie rights. There is enough personal material here to create a motion picture with mass appeal.) Joe Peta is getting more visible. He has a blog, and recently spoke at the prestigious MIT Sports Analytics Conference.

Despite all that I just couldn’t shake off the feeling why it is rational to simply give away a fundamentally sound strategy. This is not a Bringing Down the House situation where the edge from card counting at the blackjack table was already gone because the casinos wouldn’t allow it. At that point, leveraging the story into a book, and eventually a movie, made perfect sense. In contrast, Peta has something that could still work. I don’t see it working after this book.

Is it possible that the book doesn’t really give it away but just appears to do so? Nah. Peta goes into enough detail that any sportsbook would be able to make enough adjustments, if they wanted to. After all, they can always hire a sabermetric guy, give him this book, and say “fix my pricing”.

Whatever it was, I felt Peta owed me an explanation. He didn’t start offering one until it was too late, in the Epilogue, and even then it was incomplete. I’m still curious.

The Idea of a Sports Fund

The idea of a baseball fund may appear to the uninitiated reader as an original idea. It’s not. Mark Cuban made a pretty big splash in 2004 when he proposed a hedge fund that would exploit the opportunities in the marketplace just the way Peta has. In fact, while it didn’t get a lot of press in the U.S., such a hedge fund, Galileo, launched in 2010, only to go bust within the next two years. The point here is not whether such a hedge fund could live or is destined to die, but rather it would have been nice if the reader was alerted to other people who either entertained, or implemented, the idea of a sports fund. This must have been an oversight by Peta, as he is far from a shameless self-promoter. He is just a pretty good storyteller who has an interesting life. To be fair, it’s not easy to keep track of all the “sports funds”, anyway. I just learned about this one, for example.

The Broader Idea – Sports As A New Asset Class

Peta doesn’t use the term “asset class” in his book but he signals his thinking through the title of his conference talk and in this Bloomberg piece. He is right about the sexiness of a sports ticker tape, the general speculative appeal of sports performance products, and how they can help the portfolio manager because they would have no correlation with other asset classes, which of course is a big deal in portfolio management.

Peta has the vision, but something drastic needs to happen on the supply side for that vision to realize its full-potential. While there may be a few untapped business models on betting and probably some arbitrage opportunities that can be exploited through careful analysis, the real advance will be to create sports markets and make them part of the federally regulated landscape. The betting markets have zero hope of getting there, but there are other possibilities. In fact, we have created two such markets. The first market was performance-based and after many twists and turns, it is now a pending case before the Supreme Court of the United States. The Sports Risk Index (SRI), which lends itself nicely to futures trading, is a formula that is a proxy for revenue generation potential of sports franchises. The formula includes various economic factors, but not performance, and is patent pending in 45 countries. It is described in detail in this paper.

Creating the markets is just half of the equation. The other half is federal regulation. Peta, despite his deep knowledge of financial markets, makes the classic mistake of calling a derivative a bet. There is very subtle difference between individual usage and markets as institutions. It is of course true that there are a zillion traders out there just trying to make money. Some of these speculators exhibit gambling behavior. Yet the same speculators offer liquidity to the hedgers, and help the markets produce socially useful prices. These two aspects, hedging and price discovery, are what differentiates derivative markets from gambling markets. They are explicit in the law, as well. Peta’s argument that sports bets are just like financial futures was actually made in a court setting by Jay Cohen, the operator of an off-shore sportsbook more than ten years ago. It didn’t prevent him from going him to jail for violating the Wire Act. (The excellent Cutting the Wire devotes an entire chapter to Cohen’s story).

Sports is a new asset class, but for this to have true meaning, regulator approval is needed. For SRI-type products that do not derive their value from performance, the road ahead is not easy, but easier. What about for products that derive their value from sports performance? Do they belong in federally regulated markets? When properly structured, we believe they do, and this is what the pending Supreme Court Case is all about.

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