With headlines touting the growth of the US sports betting market emerging on a regular basis, it would appear risky to bet against the related equities. But that’s exactly what some hedge funds are doing.
Ken Griffin’s Citadel Advisors, a mammoth $194 billion, Chicago-based hedge fund, is one of several related investment vehicles that have short positions in British bookmaker GVC Holdings Plc. Hedge funds are making bearish bets against some UK-based sports betting shops because of regulatory crackdowns there.
Hedge funds’ increasingly bearish stance on the UK’s betting industry comes as the sector faces a potential squeeze from tough new rules designed to curb problem gambling,” notes hedge fund industry publication HedgeWeek. “The UK Gambling Commission, the industry watchdog, earlier this year announced a ban on the use of credit cards in online betting, effective from 14 April.”
GVC has increasing exposure to the fast-growing US sports wagering market through ROAR Digital, an online partnership with MGM Resorts International.
Going Against The Crowd
Regulatory filings indicate Citadel’s short wager on GVC amounts to 0.6 percent of its portfolio, while Citadel Europe allocates 1.23 percent of its roster to a bearish bet against the British bookmaker. Citadel isn’t alone in hoping shares of GVC slide.
“AQR Capital Management, the USD186 billion US quantitative hedge fund established by ex-Goldman Sachs trader Cliff Asness, and P Schoenfeld Asset Management (PSAM), the event driven-focused manager, which specializes in merger arbitrage and special situations trades, are also short on GVC,” according to HedgeWeek.
Selling short any stock is risky because there is no cap on how high an equity rise, meaning liabilities are potentially unlimited for those making bearish wagers.
In the case of UK-based sportsbook operators, such as Flutter, GVC, and William Hill, what makes betting against these stocks tricky is that plenty of analysts and market observers believe the operators’ US footprints are not adequately reflected in current share prices.
That leaves room for upside in those names, which would burn market participants hoping the equities will falter.
Other Bearish Plays
GVC isn’t the only sports betting name being targeted from the short side by hedge funds. Kuvari Partners currently devotes 0.53 percent of its portfolio to bearish position against William Hill.
In either case, the aforementioned short trades standout because many hedge funds have recently been building bullish stakes in sports betting stocks – both American and British – as ways of tapping growth in the US market.
Conversely, there could be something to the bearish bets. Currently, rosy projections range from $5 billion to $8 billion in earnings for US sports betting companies several years out — not large numbers — and an executive from MGM recently acknowledged that the company’s sports wagering operations may not be profitable until 2025.
Citadel’s bet against GVC isn’t a commentary on the broader industry. The hedge fund has long positions in Caesars Entertainment (NASDAQ:CZR), Las Vegas Sands (NYSE:LVS), and Melco Resorts (NASDAQ:MLCO), among other gaming stocks.