The Hedging Technique: A Betting Strategy for Risk Management
It’s likely that you’ve used the phrase “hedging your bets” at some point in your life. At the very least you’ve surely heard the phrase before, or some version of it. This is a widely used phrase, and not just in the context of sports betting. People use it in all kinds of situations, usually to refer to the act of playing it safe or mitigating risk in some way.
For example, let’s say we were about to go on an unexpected trip overseas. We didn’t know what the weather was going to be like, so we decided to pack winter clothes AND summer clothes. This would be a clear case of “hedging our bets”.
There are countless other examples of how people hedge their bets in various aspects of their life. This article is all about how hedging works in sports betting though. We believe that the hedging technique is a very powerful strategy in certain situations, so we want you to learn how to use it.
Below we teach you everything you need to know about hedging. We start with a brief explanation of the technique and clear up a common misconception about hedging. We then talk about when and why the technique should be used, using examples to demonstrate.
The Basics of Hedging
In very simple terms, the hedging technique involves placing wagers on different outcomes of the same event. An example would be backing both players to win the same tennis match. This might seem like a crazy thing to do, but it actually can be quite sensible in some situations.
A good way to think about hedging is to view it as a form of “insurance”. It’s basically a risk management technique, where you place additional wagers to protect previous wagers against potential losses. Although it’s not a technique we recommend using TOO often, you’ll almost certainly encounter scenarios where it’s worth considering.
There are three primary scenarios where the hedging technique is a viable and appropriate strategy. We explain each of these in detail later, but here’s a quick overview for now.
When you have the potential to “lock in” some guaranteed profit from an existing wager.
When you’ve changed your mind about an existing wager for some reason.
When you realize you’ve made a mistake with an existing wager.
Something you may notice here is that each scenario refers to an existing wager. This is a key point, as it’s rarely correct to bet on multiple outcomes of the same event at the SAME TIME. Doing so usually just costs you money, or at least reduces your potential for profit.
To demonstrate, let’s look at what would happen if we bet on both players to win the same tennis match. Here’s the market for an upcoming match between Stan Wawrinka and Marin Cilic.
Wawrinka vs Cilic
Let’s say we placed a $100 wager on each player here. We’d be staking $200 in total, with potential returns of $170 if Wawrinka wins and $220 if Cilic wins. A win for Wawrinka would give us a loss of $30, while a win for Cilic would make us a $20 profit.
There’s absolutely NO benefit to betting on both outcomes here. If we just staked $30 on Cilic instead, we’d still stand to lose $30 if Wawrinka wins. We’d stand to win $36 if Cilic wins though, as opposed to just $20.
Now, there ARE times when betting on all the possible outcomes of an event is a good idea. Doing so at the same time is only viable when using the arbitrage betting strategy. There’s a common misconception that hedging and arbitrage betting are the same thing, but they’re actually very different strategies. Arbitrage betting is all about taking advantage of pricing discrepancies in the betting markets, as we explain the following article.
The hedging technique has NOTHING to do with pricing discrepancies in the betting markets. As we mentioned earlier, the key to this technique is that we use it for existing wagers. The idea is simply that we back alternative outcomes when we want to change our position from a previous wager. Sometimes we’ll do this to avoid or minimize losses, and sometimes we’ll do it to guarantee a profit.
With this important point made, let’s now look at how the hedging technique can be used in different scenarios.
Hedging for Guaranteed Profits
Scenarios where you can hedge for guaranteed profits are not especially common. You may encounter a few if you regularly place futures (or outrights) though. Here’s an example.
Sticking with the tennis theme, let’s say we’ve backed David Ferrer to win the French Open at the start of the tournament. We’ve placed a $100 wager at odds of 11.00, meaning we stand to make a profit of $1,000 if the wager is successful. We’re going to lose $100 if it’s not.
Ferrer then makes it to the final of the tournament, where he’s up against Novak Djokovic. With just our initial $100 wager in play, we’re in an “all or nothing” situation. Ferrer winning the final would give us our $1,000 profit, but we’d lose our entire stake if Djokovic gets the victory.
This is a great opportunity to use the hedging technique to lock in some guaranteed profit. We could place an additional wager on Djokovic, to ensure that we make a return regardless of who wins the final.
Let’s demonstrate how this works. The betting market for the final is as follows.
Ferrer vs Djokovic
Djokovic is the favorite here. Assuming the bookmakers have got it right, this means we’re more likely to lose our initial wager than win. So, unless we were absolutely convinced that Ferrer was going to win, hedging would be a sensible option here.
The decision we’d need to make is HOW MUCH we wanted to hedge. This decision should be based on our overall outlook at the time of hedging. A good starting point to work from is to look at what would happen if we backed Djokovic with half of the potential profit from Ferrer winning ($500).
This would give us a total outlay of $600. We’ve got $100 on Ferrer at odds of 11.00, and $500 on Djokovic at 1.50. Our potential returns are as follows.
Ferrer wins: $1,100 ($500 total profit)
Djokovic wins: $750 ($250 total profit)
As you can see, we’ve managed to lock in some profit here. Whatever the result of the final, we’re guaranteed to end up ahead. There’s a bit of an imbalance on the possible returns, however, as we stand to make a lot more if Ferrer wins.
We might be happy with this situation if we still favored Ferrer. We might prefer a more balanced return though, in which case we could adjust our stake on Djokovic accordingly. If we staked $700, for example, our potential returns would be almost even. We’d have staked a total of $800, with the following potential returns.
Ferrer wins: $1,100 ($300 total profit)
Djokovic wins: $1050 ($250 total profit)
Staking this much on Djokovic would mean we’ve given up a big slice of profit if Ferrer does get the win. But we’ve spread our risk pretty evenly, so that it no longer really matters to us who wins.
There’s no “correct” approach here. Some people prefer to hedge in a way that gives them a balanced return whatever happens, while others prefer just to make sure they cover their initial stake. We generally advise that you should treat each situation individually, and try to make a decision based on all the information you have at hand.
Hedging for guaranteed returns can also be possible when placing parlays (or accumulators). For example, let’s say we’ve placed a parlay on five football teams to cover the spread. The first four teams have covered, and the fifth is still to play.
In this situation, it would be worth placing a hedge wager AGAINST the fifth team in our parlay. We’d win our parlay if the team did cover, but we’d win our hedge wager if it didn’t.
Hedging Due to a Change in Outlook
This is the most common use of the hedging technique. There will frequently be occasions where your views on the likely outcome of a sports event have changed for some reason, and this can leave you with wagers that are riskier than you originally thought. In these situations, the hedging technique can be used to reduce that increased risk.
The idea here is basically that we place additional wagers to adjust our initial position. This will usually cost us money overall, but it’s often the right thing to do. Let’s use another example to demonstrate.
For this example, we’re betting on a soccer game between Watford and Bournemouth. The initial betting market is as follows.
A few days before the game, we decide to bet on Watford. They’re in good form and we think that form will continue. We place a $100 wager on Watford to win, meaning we have a potential return of $175 (including stake).
In the lead-up to the game, Watford loses two of their best players to injury. This changes our view somewhat, and we’re no longer quite so confident that Watford will win. We’re not particularly comfortable with being exposed to a $100 loss if they don’t, so we look at hedging our initial wager.
At this point the betting market has changed, as the bookmakers have reacted to Watford losing players to injury. The odds are now as follows.
Watford are still the favorites to win, but their odds have lengthened. The odds for a draw and a Bournemouth win have both shortened. We’ve now got some decisions to make. First, do we want to try to hedge the entire $100 stake? Second, do we want to cover the draw AND a Bournemouth win, or just the draw.
Let’s say that we still think there’s a good chance Watford will win. We don’t want to give up ALL the potential profit from our initial wager, but we do think there’s an increased chance of the game ending up in a draw. A sensible option would, therefore, be to place a small wager on the draw.
Something like $30 would reduce some of our risk, but still leave us with some potential profit.
The problem with hedging in this way is that we’re still exposed to a Bournemouth win. In fact, we’ve INCREASED our potential losses if that should happen. If we wanted to play it even safer, we’d need to back both the draw and the Bournemouth win.
If we backed the draw at $50, and the Bournemouth win at $40, we’d have the following potential returns. These all include the initial stake.
Watford Win: $175
Bournemouth Win: $152
We’ve staked a total of $190 now, so we’re guaranteed to lose money. We can only lose a maximum of $48 though, which is obviously less than the original maximum loss of $100.
Hedging in this way would only be appropriate if we were really convinced that Watford was no longer going to win. It’s never great to create a situation where we’re guaranteed a loss, but it IS an acceptable thing to do sometimes.
As with hedging for guaranteed profits, there are no definitive rules about exactly how to hedge in these sorts of situations. The key is to think carefully about how your outlook has changed, and then make sure that you manage your overall risk accordingly.
Hedging Due to a Mistake
In this context, we’re not talking about making a bad betting decision. We’re talking about making an error when placing a wager. This could be something like entering the wrong stake when betting online, or marking the wrong selection when completing a betting slip in a bookmaking shop.
These are mistakes that you hopefully won’t make too often. They can and do happen, though, even to experienced bettors. And they can be quite costly, as you’re not usually able to cancel a wager once it’s been confirmed.
If you do make an error when placing a wager, you basically have two options. The first is to simply let the bet ride, and hope that it ends up winning. This is not exactly ideal, as you’ll basically have risked money that you didn’t want to risk. That’s never a good situation to be in.
An alternative is to use the hedging technique to mitigate your potential losses. How? By betting on the other outcome (s) so that you’ll get some money back whatever happens. Here’s an example.
We’re betting on a football game, between the New England Patriots and the Seattle Seahawks. We’ve already backed the Patriots to cover, and we’re looking at betting the total as well. The market is as follows.
New England Patriots vs Seattle Seahawks
We decide to back the over but aren’t really concentrating when we place the wager. We actually back the UNDER by mistake, for $100. So, we’ve now got $100 at risk on the wrong selection.
Hedging in this situation is very straightforward. We’d just back the over as well, also for $100. Both wagers are at odds of 1.91, so we’re going to get $191 back whatever happens.
This means we’re guaranteed to lose $9, but that’s hardly a disaster. It’s certainly better than losing $100 on a wager that we didn’t mean to place!
Now, hedging due to a mistake isn’t always this simple. If you’re betting on a market with more than two possible outcomes, for example, you’re going to have to back ALL the different outcomes. And if you’re betting on a market where the selections have different odds, you’ll need to do some math to work out how much to stake.
The thing to remember here is that the ultimate aim
is simply to reduce the potential cost of your initial mistake.
You need to make sure that all possible outcomes are covered, and that the amount you’re going to lose is as small as possible.
Some Final Points
There are many betting “experts” who believe that hedging under any circumstances is a bad strategy. They argue that hedging simply increases the margin paid to bookmakers and that the important thing is actually to make the right wagers for the right reasons in the first place.
While we understand the logic of this argument, we strongly disagree with the idea that hedging is ALWAYS the wrong decision.
We firmly believe that the hedging technique is a very powerful tool.
Although we tend to use it quite sparingly, in the right situations it’s THE best way to manage our exposure to risk. And risk management is a vital part of betting on sports. It’s something that the most successful bettors in the world take very seriously, and they’re very good at it too.
If you want to be successful, you’ll need to be good at managing your risk too. The hedging technique is not the ONLY way to do this, but it’s definitely something to have in your locker. The key, as with any betting strategy, is to learn how and when to use it effectively.
The biggest problem with hedging is that knowing when and how to hedge is more of an art than a science. As we’ve already mentioned, this is not a strategy that comes with any “rules” about exactly what to do. It’s really a case of using your judgment, and then doing whatever you feel comfortable with.
This won’t be easy to start with, but you’ll get better with experience.
Sometimes you’ll be sure that hedging is the right thing to do. Sometimes you’ll be sure that’s it not. A lot of the time, however, you won’t really know either way. The best advice we can offer is to simply take the time to fully assess each individual situation where hedging is possible.
Try to work out the pros and cons of hedging in that situation, and then make a decision about what to do.
As you gain experience with the hedging technique, you’ll be able to make these decisions instinctively.
Just remember that there is no right or wrong here.
Your use of the hedging technique should ultimately be based on your personal preferences, your overall betting strategy and your attitude to risk. It’s basically up to you to work out how this strategy can be implemented to help you achieve your goals.
One other thing to bear in mind is that hedging works best when used together with proper bankroll management. So, if you’re not familiar with how to manage your bankroll when betting on sports, be sure to check the following article out.