• Vice Arbitrage investing targets sectors like cannabis and sports betting as they become legal.
• Companies capture existing demand from unregulated markets, converting it into legitimate revenue.
• State-by-state legalization acts as a predictable catalyst for market expansion and growth.
• These high-growth opportunities come with significant regulatory risks, suiting diversified portfolios.

The Curious Case of Cashing In on Bad Habits

There's a certain irony, isn't there, in finding that some of the most talked about investment themes today are in sectors our grandparents would have considered, well, unseemly. Activities once confined to back alleys and hushed conversations are now the subject of glossy investor presentations and quarterly earnings calls. To me, this shift from prohibition to profit represents a fascinating, if slightly absurd, opportunity for those with a pragmatic eye and a stomach for uncertainty.

It’s not about some grand moral revolution. I think it’s far simpler than that. It’s about governments realising there’s an enormous amount of money flowing through unregulated, untaxed channels, and deciding they’d rather have a piece of the pie. This is the core of the so called vice arbitrage play. It isn’t about creating new demand, it’s about capturing existing demand that’s finally stepping into the light.

From Back-Alley Bets to Boardroom Boasts

Take sports betting. For decades, Americans who fancied a flutter on the weekend’s game had to use offshore websites or a local, unofficial bookmaker. The money was always there, it was just hidden. Then, a Supreme Court decision in 2018 changed everything. State by state, the floodgates opened.

Suddenly, companies like DraftKings, which started in fantasy sports, found themselves at the forefront of a legitimate, multi billion dollar industry. They didn’t have to teach people what betting was, they just had to offer a slicker, safer, and legal alternative to what people were already doing. Each new state that legalises the practice is like a new territory opening up for settlement, and the established players have their wagons ready to roll. The potential for growth is clear, but it's tied directly to the slow, grinding pace of legislative change.

The Not So Simple Green Rush

The cannabis sector is an even more peculiar beast. Here we have an industry that is still illegal at the federal level in the United States, yet flourishing in dozens of individual states. Companies like Tilray are navigating a regulatory labyrinth that would give anyone a headache. They face challenges with everything from basic banking to marketing their products.

But here’s the interesting part. Those very headaches create a sort of defensive moat. It’s incredibly difficult for a small startup to manage the legal complexities across multiple jurisdictions. The companies that have already figured it out, that have the scale and the lawyers, have a significant head start. The real prize, of course, would be federal legalisation, but banking on that feels a bit like waiting for a bus that might never arrive. Still, the state by state expansion provides a steady, if bumpy, road forward.

Putting these disparate companies together, from bookmakers to cannabis growers, feels a bit odd at first. It’s a motley crew, to be sure. Grouping them into a theme, like the Vice Arbitrage basket, makes a certain kind of sense if you’re looking to capture this specific regulatory shift. It’s a portfolio of businesses built not on inventing the future, but on legitimising the past.

A Word of Caution, Naturally

Now, let’s not get carried away. Investing in these areas is not a one way ticket to riches. Far from it. Any investment carries risk, and these stocks carry more than most. They are at the mercy of politicians, who can change their minds with the political wind. A new administration or a shift in public mood could alter the landscape overnight. Competition is also fierce. When a new market opens, everyone rushes in, which can squeeze profits. These stocks can be incredibly volatile, lurching up and down on news of a passed bill or a failed vote. This is not a comfortable ride, and it requires a certain conviction and a long term view.

Deep Dive

Market & Opportunity

• The core opportunity is capturing existing consumer demand from unregulated "gray" or "black" markets as they become legal and regulated.
• Sports betting is now legal in over 30 U.S. states.
• Cannabis is legal for medical use in 38 states and for recreational use in 21 states.
• Following legalization in 2014, Colorado collected over $387 million in cannabis taxes and fees in the first year.

Key Companies

• Draftkings Inc (DKNG): An online sportsbook operator that evolved from a daily fantasy sports platform. Revenue grew from $322 million in 2019 to over $3 billion by 2023.
• Tilray Inc (TLRY): A global cannabis company with cultivation, distribution, and retail operations across multiple countries. It has a market capitalization in the billions and is positioned for international expansion.
• Altria Group Inc. (MO): A traditional tobacco company (maker of Marlboro) that is diversifying into alternative products like e-cigarettes and has invested in cannabis producers like Cronos Group.

Primary Risk Factors

• Regulatory environments can change unpredictably due to shifts in political administrations or social attitudes.
• Companies face operational challenges, including banking restrictions and advertising limitations.
• Intense competition in newly legalized markets can lead to price wars and pressure on profit margins.
• Stocks in these sectors can experience significant price volatility based on regulatory news and market sentiment.

Growth Catalysts

• The state-by-state legalization process creates a predictable pattern of new market entry opportunities.
• First-mover companies can establish a regulatory moat due to high licensing and compliance costs for new entrants.
• The potential for future U.S. federal cannabis legalization would dramatically expand the market.
• International expansion presents a significant growth opportunity as other countries, like Germany, move toward legalization.

Investment Access

• The Vice Arbitrage theme is available as a basket of stocks on the Nemo platform.
• Nemo is an ADGM-regulated platform offering commission-free investing.
• Investments can be made through fractional shares starting from $1.