Wednesday, October 24, 2012

Practical arbitrage, or how to be a hedge-fund manager in your own backyard

Right now, Intrade has Obama at $5.55 a share. That means odds of 1.80 to 1.

Sportsbet has Romney at 2.63 to 1 (and Obama at a far more reasonable 1.50 to 1).

This means if you bet $10,000 on Obama at Intrade, and $7,000 on Romney at Sportsbet, you win no matter what!

You spend a total of $17,000; if Obama wins, you get $18,000; if Romney wins, you get $18,400. Either way you make at least a grand.

And,. you get to call yourself a hedge-fund manager, with an 8% return for 2 weeks worth of arbitrage, or a roughly 200% annual return.

This is what high-finance does; it makes money on the margin, the difference between what two groups of people think is reasonable. No wonder there is so much unreasonableness in the world; there is an entire financial market dedicated to exploiting it, and thus, perpetuating it.

No comments: