A quant hedge fund has developed a model to predict the winner of the Super Bowl.
Los Angeles-based Analytic Investors believes that the Denver Broncos will beat the Seattle Seahawks in the Super Bowl XLVIII by more than three points.
For the past several years, Analytic Investors has released its “NFL Alphas” [.PDF] analysis.
The “NFL Alphas” model first began with portfolio manager Steve Sapra, who’s really in to sports economics. This year, the analysis was completed by portfolio analyst Matt Robinson, who focuses on Japanese equities at the fund.
Robinson explained that the NFL Alphas model analyses NFL teams as if they were stocks. Basically, they look at each teams return on investment (ROI) for the year if you were to have placed a consistent wager on them throughout the regular NFL season.
Analytic Investors’ calculations show that the Seahawks have an alpha of 13.7% and the Broncos have an alpha of 4.6%.
However, the quant shop believes that sports bettors are likely to overestimate that the the Seahawks are going to win because their alpha is higher. Analytic Investors is predicting that the Broncos will be victorious.
To understand why, here’s how the model works:
Over the course of the season, NFL teams play each game with a point spread. The spreads are established by bookmakers in Las Vegas. The bookmakers make a line.
For example, if you’re going to sports bet in Vegas and you’re going to bet on the Giants, you might bet that they win a regular season NFL game by more than three points. If the Giants only win by two points, you’re going to lose money.
In sum, a point spread can be thought of as the market expectation for each team for each game. How they perform versus the point spread is either alpha or the reverse.
Once Analytic Investors computes the teams alphas, they throw in some analysis of their own.
Based on Analytic Investors’ NFL Alphas model, history has shown that between the regular NFL season and the post season, or even the following regular season, there tends to be a mean reversion of the alphas.
Basically, teams that underperformed throughout the year tend to outperform in the post season, and the following season. Teams that outperformed during the regular season tend to underperform during the post season.
That’s why the team with the lower alpha is expected to do better in the Super Bowl.
Need proof? Over the last 10 Super Bowls, the model has correctly picked the under-valued team nine times.
“The Broncos will win because they had the worst ROI, return on investment, out of the two teams,” Robinson told Business Insider. “So we see that the team with the lower ROI, or alpha, tends to be a little undervalued going into the post season.”
All of this is actually analogous to the stock market.
“If you’re looking at these two teams as stocks, you could see the Seahawks as the team that’s in the news and has kind of relatively outperformed and it’s a hot stock that’s been bid up throughout the year. And we expect that stock to come back to earth, per se, in the post season,” Robinson explained, adding that the Broncos have relatively underperformed in comparison.
Of course, Analytic Investors doesn’t use the NFL Alphas model to make money for the fund or to sports bet. They do this just for fun, Robinson added.
Check out the alphas below:
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