Why Hedge
In the securities and finance markets, to hedge is to take two or more investment positions simultaneously. The risks should cancel out and an excess rate of expected return should remain.
In a real horse race (or any pari-mutuel contest for that matter), the true probabilities are not known. If we knew the true probabilities or had better estimates than the pari-mutuel pool offers, we might find horses with a positive expectation. Then we could simply bet directly on those horses instead of developing the following method for the daily double.
There is a plausible argument which upholds the pari-mutuel pool's estimate of the true horse winning probabilities: "If there were a method of predicting horse winning probabilities, and these probabilities differed enough from the pari-mutuel pool's estimate to give the predictor an advantage, then he would place bets and by so doing would cause the pari-mutuel pool odds to shift in such a way as to reduce that advantage. With many bettors and much information and available computing power the overall effect is to reduce such advantages so they are small or even become disadvantages."
In other words, "If you could beat the casinos at blackjack, then they would change the game so you couldn't. Thus, there isn't any system for beating them."
If we assume that pari-mutuel pool probabilities are true probabilities then the horse hedge system does not improve our edge over the track take! You might think that makes the horse hedge idea useless, but this is not true. Consider the daily double pool: The payoffs should be consistent with the probabilities in the individual race win pool; but in general, they aren't consistent. Thus, we have a chance to use the probabilities based on the individual race win pools.
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