URGENT UPDATE: Major hedge funds are increasingly looking towards prediction markets like Kalshi and Polymarket for crucial market insights, as confirmed by Shayne Coplan, CEO of Polymarket. The company has just announced its clearance for a US launch, signaling a potential shift in how institutional investors gather data.
These platforms have surged in popularity, capturing the attention of trading firms and hedge funds seeking a competitive edge. However, while some firms are beginning to engage with these markets, most hedge funds are primarily interested in the data they provide rather than direct trading. Dysrupt Labs, an Australian data company, utilizes these markets to monitor consensus “drift,” which can indicate shifts in market expectations.
Despite headlines celebrating big payouts from gamblers, hedge funds are cautious. Many funds find the trading volumes on platforms like Kalshi and Polymarket insufficient for substantial macro bets, which often require deeper liquidity. Compliance issues also pose a challenge—many funds struggle to obtain sign-off from their compliance teams to use these relatively new platforms.
The interest from hedge funds has led to a growing trend similar to the GameStop phenomenon, where funds closely analyze retail trading behavior on platforms like Reddit. Now, they are ingesting data from prediction markets to inform their investment strategies. Polymarket has made strides in this area, offering a free data feed on trading volumes and partnering with Intercontinental Exchange and Dow Jones to enhance data offerings for financial institutions.
In an illuminating interview, Karl Mattingly, CEO of Dysrupt Labs, revealed that their algorithms utilize prediction market data to assess if the “informed minority” is deviating from consensus expectations. He stated, “The signal we generate from recurring economic releases can provide an early view on changing prevailing views within two to four days.” Mattingly emphasized that traditional consensus data aligns with prediction markets 95% of the time, offering traders an opportunity to capitalize on the remaining 5% divergence.
As Mattingly puts it, “Prediction markets are the fastest way to model a known unknown,” with the average drift from consensus potentially leading to gains of up to 12 basis points. He pointed out the pressing need for financial markets to access faster and better information, making these platforms increasingly valuable.
Despite the potential, many hedge funds remain uncertain about how to fully leverage prediction market data. According to Daryl Smith, head of research at Neudata, “Macro managers aren’t incorporating Kalshi’s odds on significant geopolitical events into their models just yet.” He adds that current interests often intersect with sports betting industries, as funds use prediction market data to gauge the general interest in gambling—an indicator for stocks like DraftKings and Flutter Entertainment.
As hedge funds continue to explore the capabilities of prediction markets, the landscape is rapidly changing. Stay tuned for further updates as this evolving space could redefine investment strategies. The financial world is watching closely to see how these new tools will impact market dynamics in the near future.
