Mark Cuban is an undeniable idea machine. But one of his boldest ideas yet may have proven too hot to handle.
Centaur, a London-based investment company, launched its Galileo fund in 2010 based in part because of an idea Cuban proposed in a 2004 blog post -- creating a hedge fund that invested in sports bets. It didn't last very long, however, as the fund appears to have collapsed on Monday, according to Wager Minds.
Cuban's original idea for a fund similar to Galileo revolved around the idea thats sports provided more information to investors than actual American companies.
"It's not unusual to hear people refer to trading stocks as no different than going to Vegas. They are right. Gambling isgambling [sic]," Cuban wrote in his blog at the time. "The question really is, which gives the opportunity for a better outcome?"
"When you think about betting on sports, there really is far better information about your local sports team than there is about any local business in your market. The local papers cover the team every day. The localTV station gives a report about every game. There areradio stations who cover them for hours at a time [sic]," Cuban added. "That's far better than we get from public companies."
Though Galileo wasn't a traditional hedge fund, its collapse may highlight some of the risks inherent in others, which aim for high-risk, high-reward investments, sometimes with large-scale consequences. A recent paper from two Yale professors found that hedge funds may have played a larger role in the financial crisis than many originally thought. John Paulson's hedge fund, for one, has been tied to claims that Goldman Sachs purposefully created financial instruments they assumed likely to go bust -- and then bet against them.
Financial crisis or not, another study, this one by Princeton researchers, found hedge funds to be "far riskier and provide much lower returns than is commonly supposed." In other words, lots of the bad stuff without so much of the good.
Galileo, which required a minimum of roughly $135,000 to be come an investor, used a number crunching system that the founders argued allowed the fund to bet on sports with much more accuracy than the casual gambler, according to the Los Angeles Times. In his blog post, Cuban argued that because the sports betting market is less efficient than other markets, anyone who applied a "smart money" strategy to investing in it would have a good chance at success.
That's a notion with which Tony Woodhams, Centaur's managing director, previously said he agreed.
"We have unique software we've written over five years that ensures we purely trade on statistics and probabilities," Woodhams told CNBC in 2010. "The process is very clinical, which is our edge."
Despite Woodhams' confidence, it appears that there may have been some red flags indicating Galileo was headed down a bad path, according to Wager Minds. The fund was regulated by Gibraltar's government, instead of the British government. At this point, the reason for the fund's collapse is reportedly still unknown.