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Thursday, December 18, 2008

ADW Cash Management

With account holders at the now bankrupt Hinsdale Greyhound Track facing uncertainty as to the future of their funds, this is an appropriate time to review a few basics regarding ADW accounts and money management. First and foremost, it is important to remember that an ADW is not a bank and should not be treated as a bank and deposits at an ADW are not protected as they are in a bank account covered by FDIC Insurance. This may sound like an obvious point, but it is one that needs to be highlighted because there is no deposit insurance protection for money held in an ADW account. In addition to potential bankruptcy issues, such as the case with Hinsdale, if for some reason federal regulators decide that there may be improper activities occurring either at the ADW or within its client base, they can easily freeze the accounts which will put your funds in limbo for an undetermined amount of time (one recent example is the federal government seizure of IRG funds at youbet.com back in 2007). In such a situation, while in all likelihood you would eventually get your money back, you will be unable to access it if you need it which has the potential to create undue hardship. As a result, it would behoove horseplayers to avoid stockpiling money in ADW accounts and instead keep the funds in those accounts limited to short-term capital (i.e. the amount necessary to cover a few weeks handle). Amounts in excess of necessary short-term capital should be transferred to an FDIC insured bank account (which now covers over up to $250,000 of total funds held at that bank), preferably one which pays interest. Horseplayers with more significant cash reserves should review their situation with their accountant/portfolio manager to make sure they have the optimal cash management based on their risk/return levels and liquidity needs.

On a related note, there is the temptation to call for ADWs to be regulated and held to the same standards as banks as a result of the Hinsdale bankruptcy. While this is an understandable sentiment, it is important to note that any additional regulation imposed will have a cost associated with it and that cost will be shouldered by the horseplayer and it also has the potential to cause some providers to withdraw from the ADW market, thereby reducing competition. Along the same lines, it is important to keep in mind that any potential problems using a domestic ADW are dwarfed by those issues one would be facing if an off-shore entity was utilized. While current regulations may have their flaws, when things go wrong you want to be able to contest the matter under U.S. business law and it is inherently more difficult recouping funds once your money crosses the border.

3 comments:

Anonymous said...

I am disappointed with HANA's reserved response to the issue of protecting horseplayers' accounts.

HANA said...

Hi A,

Many horseplayers don't know they are not afforded protection so we felt that important as a note.

We will be discussing this more. Perhaps as early as today.

Thanks for the comment.

HANA

kevin morris said...

I would assume that the ADWs are making a lot of money off the funds sitting in accounts with them, if only by getting bank interest on a percentage of it, so it would behoove them to offer some type of insurance to maximize the amounts left in these accounts.
I think your warning regarding the current status of these accounts was a service to members, not an endorsement of how ADWs handle our money. If I tell you your neighbor is planning to rob your house, that doesn't mean I approve of him doing it. Thanks for the heads up.