King Yao Article: 5th Reason to Hedge

[FG Kicking Mule]

Another common reason to hedge is if you have made a wager on a betting exchange that takes commission on net market winnings (such as Betfair or Matchbook). It increases your EV to make a zero or slightly negative hedge bet in the same market.

For example, suppose you short the Grizzlies +2.5 tonight at 1.9 for $100 (risking $90) at Betfair because you believe that they only have a 50% chance (fair value is 2.0) of covering that spread. Let's assume your commission rate is 4%.

If the Grizzlies don't cover, you will win $96 ($100-$4 commission).

If the Grizzlies cover, you will lose $90.

Your EV without hedging is .5*96 - .5*90= $3

But suppose you can buy back the Grizzlies at 1.99 for $95.48 (to win $94.52). You will win $4.52*.96 = $4.34 regardless of the result.

By making a slightly negative EV wager as a hedge, you have increased your EV from $3 to $4.34 while removing your variance.

[King Yao]

Thanks for the post. I am not familiar with Betfair - they don't allow Americans on their site. But it sounds like this should fall under reason #2:

2. The hedge has positive or zero EV

In this case, the commission or the avoidance of it should be calculated in the EV. Semantically (is that a word?), I say your example is a slightly positive EV hedge because the hedge is saving commissions. (This assumes I understand the BetFair commission system correctly, but I'm not 100% sure)

[FG Kicking Mule]

I think you have it right. The hedge would be considered a positive EV bet, but only in tandem with the original bet.

In the example I gave, the hedge itself is definitely a negative EV bet. You are betting $1 to win 99 cents on something that will win 50% of the time. As you said, the hedge still makes sense because the positive EV on the amount of commission that you will avoid will be greater than the negative EV of your hedge bet. Therefore, your overall EV has improved.

[LargeCents]

[ QUOTE ]
Another common reason to hedge is if you have made a wager on a betting exchange that takes commission on net market winnings (such as Betfair or Matchbook). It increases your EV to make a zero or slightly negative hedge bet in the same market.

For example, suppose you short the Grizzlies +2.5 tonight at 1.9 for $100 (risking $90) at Betfair because you believe that they only have a 50% chance (fair value is 2.0) of covering that spread. Let's assume your commission rate is 4%.

If the Grizzlies don't cover, you will win $96 ($100-$4 commission).

If the Grizzlies cover, you will lose $90.

Your EV without hedging is .5*96 - .5*90= $3

But suppose you can buy back the Grizzlies at 1.99 for $95.48 (to win $94.52). You will win $4.52*.96 = $4.34 regardless of the result.
By making a slightly negative EV wager as a hedge, you have increased your EV from $3 to $4.34 while removing your variance.

[/ QUOTE ]

Your math is wrong on this last part. You cannot add +EV to any bet combination by adding extra -EV bets.

The $4.52*.96 = $4.34 should be 94.52 * .96 - 90 = .7392 for that side. The other side is 96 - 95.48 = .52.

You're still +EV, but lost a fair amount of EV. (.7392 + .52) / 2 = $.6296 versus $3. You've lost 79% of your original value by hedging.