Sports trading company Stratagem raising a £25 million fund to bet on sports; Company set up by ex-hedge funder, run by former Goldman Sachs partner; Stratagem uses artificial intelligence to analyse football, tennis, and basketball, identifying betting opportunities; One of several startups trying to make betting markets more like financial markets.
LONDON – “A good analogy is that we’re building these robots to let them run around the floor,” Andreas Koukorinis, the founder of Stratagem, told Business Insider.
“Well, the first time we tried to deploy it the robot fell on its face.”
The “robot” was a predictive analytics programme for sports betting, meant to use machine learning and artificial intelligence to crunch through huge amounts of data and find an edge in the market to bet on.
Koukorinis had been working on the programme for around a year by this point. He had quit $3.3 billion hedge fund giant Fortress in late 2011 with the idea of bringing the analytical rigour of hedge funds to sports betting. Quantitative trading – also known as quant trading – had long existed in financial markets, where complex mathematical models were used to identify trading opportunities. Why wasn’t there something similar in sports?
“2013 was me in my living room with my wife being like what are you doing with your life?” he recalls. “You used to work in finance, we used to fly first class, and now you’re sitting here in a t-shirt in our living room with two guys, you guys are barely speaking – this is crazy. I said, no, no, there’s something here.”
‘This is the way to have an insight into AI for trading’
Today, Koukorinis’ vision is starting to pay off. Stratagem now has an office of around 30 people on Russell Square, London, which includes former Goldman Sachs quants and ex-CERN scientists. The predictive model – the robot that fell down – is up and running and bringing in money for the company. Stratagem has an internal syndicate, betting its own money and making a return.
The company is also hoping to raise a fund of around £25 million by the autumn that it will invest – in effect, a sports betting hedge fund. Most of the trading will be automated.
“The pitch [to institutional investors] is really straightforward,” says Charles McGarraugh, Stratagem’s CEO. “Sports lend themselves well to this kind of predictive analytics because it’s a large number of repeated events. And it’s uncorrelated to the rest of the market. And the duration of the asset class is short – things can only diverge from fundamentals for so long because then you’re on to the next one pretty quickly.”
McGarraugh spent 16 years at Goldman Sachs prior to joining Stratagem as CEO in September last year. He knew Koukorinis through work, was an early investor in the company, and found himself increasingly drawn to what his friend was up to.
“One of the reasons I was keen to stay close to Andreas was because this is the way to have an insight into AI for trading as it evolves,” he says. “That’s an interesting thing in terms of the bigger picture.”
Koukorinis says: “I was fortunate enough to get access to machine learning before this boom came up. I observed how people set up DeepMind [the famous London AI lab acquired by Google for £400 million in 2014], which was across the street for a while, and other AI companies.”
‘Think about oil in the ground. It’s the same as data’
Stratagem’s business has two main parts: data collection and processing. At both stages, the company believes it has an edge.
On the data collection front, Stratagem doesn’t just rely on publically available data sources but generates its own in-house data. The company employs around 65 football analysts based all over the world covering local leagues.
Koukorinis says: “Think about oil in the ground, all of this in various locations. It’s the same thing as data. Our first job is to collect up oil and bring it to the ground. We collect Twitter feeds, crowdsource videos, market data, we collect from operators, action data we buy from various sources, tech data the analysts write – all of those sources. That’s job number one.”
Once the data is collected, Stratagem must crunch the numbers. Its programme can not only read different data sources but decides the correct weighting to give each source. The end goal is for the model to spot “alpha” in the market – mispriced odds where Stratagem has a better chance of winning. The programme then places bets, both before and during games.
“For us, it’s really about having access to data that comes from multiple sources and of different textures and having the backbone of the overlay to be able to analyse them,” Koukorinis says. “That’s really the edge.”
Stratagem has built models looking at football, tennis, and basketball, and is bringing in money trading its own book.
‘Whether it’s a football match or Brexit – they are akin to options trading’
The idea of generating proprietary data and using technology to analyse sports betting markets isn’t new. I wrote extensively last year about Starlizard, a private syndicate that does just that to generate big returns for staff and partners.
Stratagem is not using its tool just for its proprietary bets but to pitch these systems to finance firms and fund managers.
“It’s interesting to see how event trading is becoming more of an interest to people I’m in touch with in the hedge fund space,” says Todd Johnson, the COO of betting exchange Smarkets. “All these things, in the end, are outcomes that we’re trying to take a bet on. Whether it’s a football match or whether Brexit is going to happen or you want to bet on insurance markets – they are in essence akin to options trading.”
Johnson, who left a hedge fund he cofounded to join Smarkets, believes the sports betting market will attract more sophisticated investors as the infrastructure around improves.
“Coming from the hedge fund world, a lot of the people in financial services and who worked in the City bet,” Johnson says. “They’ve always viewed it as something that was entertainment.
“As we start to get to tools that look and feel like the tools they use to trade equities, they’re starting to get that this is an interesting space to trade in.”
Like Stratagem, Smarkets is hoping to professionalise and financialise sports betting. It is working on a Bloomberg-style interface to help give punters more information and pitches itself as a home for sports traders. Its platform supports automated market making bots that people can set loose via APIs to trade the markets.
Johnson says: “When Jason [Trost, Smarkets’ founder] started the company he saw a lot of parallels between the opportunities in the betting markets and sports trading markets, and what happens generally in financial services.
“If you go back to where equity markets were in the 1970s and 1980s, it wasn’t a market that people actively invested in, in terms of the average investor. The technology didn’t lend itself to having great price discovery, it was expensive to trade. All those things were adjusted in the 80s and the 90s. In the betting industry, we’re seeing that.”
‘Maybe we’re on the line between genius and madness’Theye are still a long way off, however.
“The betting market certainly doesn’t have the scale, liquidity, and the velocity that you see in traditional financial services,” says Johnson.
Betfair is the largest betting exchange and the total sportsbook of its parent company Paddy Power Betfair last year was £5.6 billion. That averages out at £14.4 million a day. That is simply not enough volume to interest most fund managers.
Attempts in the past to set up a sports betting fund backed by traditional finance have also struggled. As the Financial Times pointed out last month, London-based Centaur Corporate’s Galileo fund bet on football, racing, and tennis matches. It projected returns of 15 to 20% but lost $2.5 million and collapsed in 2012, two years after launch.
People are captivated with the idea of a lot of smart guys sitting in an attic, looking at predictive analytics for sports
McGarraugh says he is confident Stratagem will be able to raise the £25 million or thereabouts it is targeting. He says the fund will “not be offered widely,” with the money coming from Stratagem’s associates.
Still, the company is hedging its bets. As well as raising the fund, Stratagem is also selling tips to punters generated by its programme and marketing its services to bookmakers to help fine tune their odds.
McGarraugh says: “This process of searching for the right business model – how do you commercialise what you’ve built? I feel pretty good that we’re on the right track.”
The reception among bookmakers has been encouraging so far, he says. “I think people are captivated with the idea of a lot of smart guys sitting in an attic, looking at predictive analytics for sports.”
The former Goldman partner also believes that the tools Stratagem are developing could well stretch beyond sports betting. The core USP, he says, is “enhancing your performance but leveraging technology, using the latest AI-style technologies.” That could apply to traditional finance just as much as sports betting.
He adds: “Maybe we’re on the line between genius and madness, but I’m pretty sure we’re on the right side. It’s a big global market. It can be better. We want to be part of this.”