Hedging bets is a strategy designed to limit a bettor’s downside. Put in the simplest terms, gamblers hedge bets by wagering on both sides. Other more complicated forms of bet-hedging exist.
Sports bettors and casino gamblers generally hedge bets for two reasons – to reduce risk or to take advantage of an arbitrage situation. This post explains how to hedge bets, what smart gamblers do to limit their risk, what arbitrage is, and how to make it all a part of your betting strategy.
Hedging Bets – the Basics
Why is this simple risk-avoidance strategy called “hedging?”
I looked up “hedge” in my Shorter OED and found this, the third definition of the word hedge used as a verb: “to protect oneself against loss on a bet or investment by making a balancing transaction.”
This use of hedge comes from the world of chess. A chess player could opt to build a hedge (a kind of wall) around certain pieces as a strategic move. The image evoked here is of a hedge as a kind of fence made of dense shrubbery, providing protection from strangers, the elements, and anything else you want to keep out.
The literal meaning of the phrase makes it an obvious fit for betting and financial investments. But you don’t just use the phrase about point spreads and stock portfolios. You can hedge any situation involving risk. Casual use of the phrase is common, as in: “I didn’t know if you wanted fries or onion rings, so I hedged my bet and got both.”
An Example of Hedging a Sports Bet
A couple of years ago, I got really into college basketball betting. I’ve since moved on. Good college basketball betting requires a huge time commitment that I found myself unwilling to make.
But for a few seasons, I was right in the thick of it.
Before the 2018 season, I’d identified my alma mater Texas Tech as a team that could potentially make some noise in March. I found a book willing to sell me a bet on TTU to win it all at +20,000. I put $100 on it, mostly as a lark, but that potential payout was too good to forget about.
I took the bet because I figured Tech had a better than 20,000:1 chance of cutting down the nets, and the $100 wouldn’t be a big loss for me if the improbable didn’t happen. But just to be sure I wouldn’t miss that $100 bill, I hedged the bet.
I did that by backing five other teams, teams I identified as more likely to win the title, to the tune of $100 each. My average odds on these other fives bets was around+650, which would help ensure a break-even performance.
All told, I was out $600, but I stood to collect anywhere from $650 to $20,000, depending who won it all, and provided one of my six chosen teams pulled it off.
Though Texas Tech made it all the way to the Elite Eight, my dreams of a five-figure payday were dashed by Villanova in a convincing performance by the then-#1 seed. I was smart enough at the time to choose eventual champion Nova as one of my covers, and since I bought them at +700, I collected $700 and turned in a small but face-saving profit.
I hedged my longshot bet on Tech with other safer bets at good enough prices to at least break even and ended up making a little bit of money along the way. I slept easy during March Madness that year, knowing I was covered no matter the outcome.
Hedging Bets to Limit Risk
Risk is the enemy of the advantage gambler. Anything professional bettors and sports gamblers can do to limit risk, they’ll try. Hedging bets is a classic way of limiting the downside of a particular bet.
In the example from my own betting history, I took an emotional risk for a long shot. That wasn’t a smart move, and certainly not part of the behaviors of a good advantage player. This was bad gambling – until I hedged my bets. It became smart gambling as Texas Tech and their heretofore unknown coach Chris Beard rose to form a new dynasty in an unlikely place.
Since that bet, the Red Raiders have reached the National Championship, and are (all of a sudden) a perennial favorite for the big dance. Does that make my longshot wager smart? No – it was still a risky move. It didn’t become smart advantage-minded gambling until I covered my risk with those other, safer bets.
All told, I backed six teams, all of which made the 64-team tournament. That meant that my odds of having picked a winner were about 1 in 10. As the games played out, and all four Final Four participants were among my selections, I was guaranteed a win. The only information missing was the amount of my win, which would be based on the team that won it all.
A Quick Guide to Arbitrage Betting
Bettors don’t limit risk exclusively by betting multiple sides of a bet, as in my own example.
Another popular way to use hedging to limit risk is through arbitrage betting. Ultimately, the goal of arbitrage betting is to cancel out risk entirely, guaranteeing a bettor a win, regardless of the outcome.
Pulling out the Shorter OED again, arbitrage is defined as a verb meaning “taking advantage of a difference in price in two or more markets.” When hot dog vendors buy a hot dog for $0.05 and sell it for $1, they’re taking advantage of a basic arbitrage strategy.
In sports betting terms, arbitrage means making multiple bets on the same event guaranteeing a profit regardless of how that event turns out. It’s often the result of sportsbooks and oddsmakers offering different lines. In certain situations, these lines can guarantee a winning result if both sides are taken at different books.
True arbitrage situations rarely occur any more thanks to the Internet and the ubiquity of odds markets. If it happened now, it would look something like this:
Imagine you take the Astros on the road against the Dodgers for +110 at Sportsbook A. You notice that Sportsbook B has the Dodgers listed at -105. If you back the Dodgers at -105 and the Astros at +110, you’d either break even or collect $5 profit no matter which team wins. This is arbitrage – it’s small-scale, and you’re not going to get rich betting this way, but it is risk-free.
Using arbitrage, you can protect your sports bets from potential loss, just like any investment hedging strategy.
How Sportsbooks Hedge Bets
Sportsbooks are experts at bet-hedging.
When a book sets a line, they do so in anticipation of taking in a balanced set of bets. It’s inaccurate to say that books try to perfectly balance both sides of every bet, but they do strike a balance to maximize profits.
When a team is likely to draw lots of public interest (due to popularity, recent in-game dominance, or some other factor) an oddsmakers’ job is to make the other side interesting enough to mitigate risk. They do this with pricing and lines. That’s a form of hedging as seen through the looking glass.
Another way books hedge their bets is known as layoff. This is when a book makes a large bet at another book to reduce liability.
Imagine the Dallas Cowboys are hosting a junior high team. Despite their best efforts with lines and prices, your local sportsbook takes in a ton of bets on the Cowboys and no bets at all on the Millard Fillmore Junior High Tigers. If the Cowboys cover the (likely massive) spread, the book will go broke paying off winners, even with Dallas listed at -100,000.
What does the book do? They make a call to another book nearby, covering their potential losses with a bet on Dallas. That way if the Cowboys win it’s no big deal, and everyone gets paid. But, if Dallas somehow fails to cover the spread, or if Millard Fillmore Junior High pulls off the upset of the century, the book isn’t out too much money, because they’ve got all the bets on Dallas to cover the bet they placed.
That’s a simplified version of how a layoff works, but hopefully, it was instructive. Layoff works to hedge the book’s “bets” the same way a bettor hedges his bets.
Pros & Cons of Hedge Betting
The main advantage of hedge betting is its value for bankroll protection. Hedging bets is all about risk management, and its disadvantages are in service of the goal of limiting risk exposure. There’s also something to be said for the additional entertainment value of hedge betting. It requires a little more research, but the reduction of risk makes watching the games and managing your bets more fun.
One knock on hedge betting is that limiting or eliminating risk comes at a cost. Some uses of hedging guarantee a loss. This is especially common with in-play or live betting, in which players make late-game wagers to reduce their losses based on the action during the game. Other times, placing a hedge around a bet limits your winnings, based on the cost of the additional bets used to build the hedge itself.
Conclusion
In sports betting, a bet hedge should always be at the back of your mind. That’s because under the right circumstances hedging bets makes good strategic sense. This is especially true in large field bets, like futures bets on championships and player awards.
With lines standardized across platforms and fewer opportunities for arbitrage and traditional hedge betting, this strategy has lost its luster. But with new ways to gamble come new ways to hedge. Betting exchanges are gaining popularity and they allow for new ways to reduce risk with hedging. Crypto exchanges are also reigniting interest in hedging as an investment management tactic.