Sophisticated investors—not gamblers—are taking advantage of a new Nevada law and pooling their money with fund managers who bet on sports. Welcome to sports gambling 2.0, where Las Vegas is Wall Street West

ON A LATE MARCH NIGHT, the sports book at the Venetian in Las Vegas is as dark as a cave and yet somehow impossibly bright, its curved rows of lipstick-red desks arced toward a sea of cinema-scale screens. The alphas in the sparse weeknight crowd check the same demographic boxes: mid-20s to mid-40s, male, Caucasian. They are sporting jerseys and kicking back with like-minded bros. Occasional yelps of enthusiasm or growls of anguish pierce the air, but low walls on each of the cubicles limit peripheral vision, making it impossible to tell who's rooting for what.

A man in a Red Sox hat and blue jeans stands in the back, surveying the room. He fixes on a young man in a Kansas City Royals jersey who's ogling replays of a Russell Westbrook lay-in. "Look at that guy," Matt Stuart huffs. "He thinks he knows everything there is to know about sports."

Stuart represents a new type of shark: one who legally wagers not only his own money but potentially hundreds of thousands of dollars of other people's as well.

Tonight is, in fact, the first time the 44-year-old professional handicapper has ever stepped inside the Venetian's book. He runs a fund through his company—Bettor Investments—and is part of an entrepreneurial group of quants who believe that sports betting mutual funds, defined legally as entity wagering, are an early iteration of Gambling 2.0: the convergence of disruptive wagering technology, gaming constructs that mimic the financial markets and new legislation that enables fund managers to accept wagering capital not just from Nevada but from anywhere in the world.

On March 31, another fund manager, Ken Murphy, would take the under in a seemingly inconsequential regular season NBA game between the Pelicans and the Nuggets. It was the first official entity wager placed as a result of Nevada Senate Bill 443, which was passed in June 2015. Unbeknownst to the teams, fans or likely even NBA officials, it was also the first time under the new law that a wagering business—in this case, Murphy's fund, Nevada Sports Investment Group (NSIG)—took money from a group of people from outside the state of Nevada and legally wagered it inside the state on the outcome of a game from one of the four major sports leagues.

Entity fund managers—as of mid-May there were reported to be six such groups—are adamant: They are not gamblers but traders. People who send them money are not bettors but sophisticated, aggressive investors seeking to diversify their assets and earn a high return. Those who sent Murphy money didn't know they were going to have a stake in the final score of Pelicans-Nuggets, a bet that cashed with 10.5 points to spare. He's prohibited from disclosing his fund's positions until after the games have tipped, just as investors are prohibited from influencing his picks. "When you look down the road 12 to 18 months and you see a fund that has created a return that is multiples higher than the most elite hedge funds in the United States, there's going to be an outpouring not only of media attention but of hedge fund aggregators, hedge funds themselves," says Murphy.

LEGAL SPORTS gambling's handle in Nevada swelled in 2015 to $4.2 billion. That number pales in comparison to the $144.8 billion the American Gaming Association estimates Americans wagered illegally on sports in the same 12-month period. A poll conducted by Seton Hall in March found that nearly two out of three Americans believe sports betting should be legal in all fifty states. Meanwhile, the rise in popularity of daily fantasy sports has helped accelerate the public conversation about sports betting. NBA commissioner Adam Silver noted on WFAN radio in 2015 that gambling is "good for business. I don't want to hide from that." Over the past 19 months he has advocated for a legal framework for sports wagering.

All of the rhetoric, however, has amounted to little action. Despite calls for legalization and steady growth of betting handles, legal, single-game wagering remains hardly more widespread than it was 20 years ago because few lawmakers have been inclined to try to amend federal wagering statutes. The Professional and Amateur Sports Protection Act has prohibited the sponsorship, operation, advertisement, promotion, licensure or authorization of single-game sports wagering in all states but Nevada since it was passed in 1992.

Enter CG Technology, one of Nevada's largest gaming companies and the operator of eight sports books in Las Vegas. The company's CEO, Lee Amaitis, brusque and Brooklyn-born, has long foreseen enormous growth potential in the traditionally low-margin, high-risk sports betting market. His company was the first to offer in-game wagering in Vegas, known as "in-running," which allows bettors to take a position on nearly every play of a game. CG spent several years developing the same type of algorithms that have long defined equities trading, but instead of using them to buy stocks and bonds, his company offers sophisticated sports betting products.

While funds that bet clients' money on sports have existed for more than five years in Europe and Australia, Quinton Singleton—who was CG's vice president and deputy general counsel until he left the company in June—is credited with drafting the entity wagering legislation. Singleton believes American entity wagering could constitute the first foray into a new ecosystem resembling money markets, with ratings agencies, market researchers, buyers and sellers of positions on games, data-driven trading platforms and even sport-specific funds.

The first wave of funds underwent a monthslong approval process during which the Bank of Nevada and CG scrutinized fund managers and investors. Even though managers use a smartphone app to process their funds' wagers and never go to a physical book, one sports book within CG's empire has to be the one that processes the entity wagers. The Venetian was chosen by the company to be that book. "From an investment perspective, CG is the equivalent of the NYSE or NASDAQ. They're the exchange promoting market liquidity," says Beau Noeske, president of Hi-Line Sports Investment Group, a Vegas-based fund.

Welcome to Wall Street in the desert.

IN A spartan home office in suburban Las Vegas, Ken Murphy is poring over a sea of betting lines on his monitor. It's mid-morning, but he's generally awake and handicapping games by 5 a.m. While data is king for Murphy, he's most comfortable making bets when his data points match up with his gut feeling on a game. "I don't do it just because I have a feeling. If I can't create some compelling, analytic reason to do something, I just don't do it. That's why I have so few games," he says in his gentlemanly Texas drawl. On an average day the 65-year-old grandfather, who spent four decades in export sales and the electronic payments industry before turning to handicapping full time about five years ago, places between one and five bets. He has invested more than $100,000 in developing his own sports-trading algorithm and charted his picks over the course of several years. Within a few months of SB 443 being signed into law, he moved from Houston to Las Vegas to set up his fund.

In the eyes of Murphy and other fund managers, betting on a large number of games to feed a thrill for action won't put funds in a position to grow. Instead they spend their time sifting through data to find discrepancies between their own projections and those of the oddsmakers, and they usually wager between 1% and 3% of their fund on a game. Rather than big payouts, they're looking for small but steady gains. The fund managers SI spoke with say they'll only take a fee if their fund nets a positive return on investment. Murphy's fund, for example, takes 30% of gross profits and targets a minimum investment of $25,000. Noeske's takes a 20% fee and has negotiable minimums. Stuart's fund takes 15% and targets initial deposits between $500 and $10,000.

But how can these fund managers continue to deliver positive returns while CG also continues to profit? Other bookmakers on and off the Strip are comfortable letting CG figure that out. The company believes that its risk management operation is honed enough to be able to balance the line no matter how many institutional wagers come in on the same side of a particular game. And perhaps they're also counting on only a few of the funds being successful.

Detractors note that the Federal Wire Act of 1961 bans interstate commerce in the form of bets or wagers. But entity wagering's proponents point out that there is no law against sending money across state lines to invest in a business. If sports betting mutual funds scale the way supporters hope they will, the entity industry will have to cross fingers that federal regulators—notoriously keen to quash any slightly suspect industry once it's grown large enough—will see nuance before they see blood.

In May, the Nevada Gaming Control Board filed a complaint against CG claiming the company was aware of systemic problems in its software that underpaid winning bettors from 2011 to '15 but did not adequately address the issue. CG could face substantial fines or even a temporary license revocation. If that happens and no other casino operators decide to offer entity wagering, the nascent industry would be crippled.

STUART PAUSES as he walks out of the sports book at the Venetian and onto the casino floor. "Do your research, even 10 minutes of research," he says, looking at the fish around him. "You'll be more equipped than 90% of the people in here." He arches his neck for a glimpse out through a tall, lurid hell of coruscating slot machines standing around him like neon trees. He used to work in poker rooms in this town, but even he has to get his bearings—he needs to find an exit.

Las Vegas is, of course, constructed to restrict this type of peripheral vision, or more accurately, entice visitors to focus inward on it. But if you're able to escape the Strip's bright, vertical occlusions, you'll notice a city encircled on the horizon by dusty brown hills that form almost a Truman Show--type wall between its fluorescent, false sense of promise and the rest of the world's reality. Here, even if you're not holing up at the Mirage, you're still more-or-less holed up at the world's greatest illusion.

Fund managers understand that prospective investors might be wary of entity wagering, or that returns on investment multiples higher than a traditional fund seem too good to be true or that Las Vegas Boulevard won't really become just another trading floor in the desert west, or that no one group of managers really has the peripheral vision it takes to be a vanguard within Vegas's viselike grip.

They understand that prospective investors might assume that either funds win or the house wins, that it can't somehow be both.

But maybe it can.

That's why you play the games.

MONEYBALL

A sampling of the "high value investment opportunities" offered by NSIG

APRIL 23

Heat vs. Hornets

First quarter Charlotte

-1 -110

PUSH

MAY 25

Sharks vs. Blues

San Jose -155

WIN

JUNE 6

Angels vs. Yankees

Under 8 runs -105

WIN

HOLE YARDS PAR R1 R2 R3 R4
OUT
HOLE YARDS PAR R1 R2 R3 R4
IN
Eagle (-2)
Birdie (-1)
Bogey (+1)
Double Bogey (+2)