- Hedge funds use prediction markets like Kalshi and Polymarket mainly for real-time odds and volume data to sharpen macro forecasting and risk signals.
- Institutional participation is rising, with firms such as Susquehanna providing liquidity and others hiring dedicated prediction-market traders.
- Adoption is constrained by thin liquidity in many contracts and ongoing regulatory, compliance, and reputational concerns, especially around political and geopolitical events.
- Alpha opportunities center on rare divergences from traditional consensus and on cross-platform or derivatives arbitrage when similar contracts price differently.
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Prediction markets—platforms where participants trade contracts based on discrete future outcomes—are evolving from fringe experiments into instruments with growing traction among hedge funds and proprietary trading desks. Two platforms in particular—Kalshi and Polymarket—are central to this development. The data they generate is proving useful as an adjunct to traditional macro models, particularly via volumes, odds shifts, and arbitrage opportunities. Their appeal is less in making large bets on outcomes and more in enhancing situational awareness and improving the breadth of inputs for risk management.
One of the strongest indicators of maturation is institutional participation. Susquehanna International Group has become a liquidity provider or market maker on Kalshi, benefiting from reduced fees and higher position limits in return for supplying the much-needed depth. Meanwhile, firms like DRW, Tyr Capital, and others are hiring prediction-market traders with full responsibility for identifying inefficiencies, arbitrage opportunities, and pricing anomalies. These roles often offer compensation commensurate with traditional derivatives traders, pointing to how seriously firms are treating this emerging asset class.
Yet these markets are still constrained. Liquidity for political or macroeconomic event contracts tends to be thin, which hampers effective execution for managers needing large position sizes. Compliance teams often raise issues—both regulatory (inconsistent legal treatment of event contracts and gambling laws vs derivatives) and reputational—especially around betting on elections or geopolitical events. Regulatory clarity is improving (e.g., Kalshi’s CFTC recognized status and some rulings in key states), but is not yet settled.
Where hedge funds believe alpha can be generated is in identifying moments when prediction markets diverge from traditional consensus. Firms like Dysrupt Labs monitor “drift”—for example, trades surrounding economic data releases—that depart from economists’ consensus, and these divergences, which occur about 5 % of the time, can yield uncorrelated return in tight windows. Arbitrage between platforms—between Polymarket and Kalshi, or versus traditional derivatives—is another emerging play, especially as market efficiency improves but platform fragmentation persists. Tools are being built to detect mispricings quickly.
Strategically, hedge funds face choices: invest in prediction market infrastructure (data feeds, trading tools, arbitrage engines), incorporate event contracts into macro models for stress testing, and/or use prediction market signals as early warning indicators. But execution risk is nontrivial: thin depth may amplify market impact, legal risks are asymmetric across jurisdictions, and behavioral risks (misinterpreting odds shifts) remain.
Supporting Notes
- Polymarket and Kalshi both offer free data feeds on trading volumes; Polymarket has established partnerships with Intercontinental Exchange and Dow Jones to develop new data products for institutional users.
- Dysrupt Labs found that traditional consensus aligns with prediction market pricing ~95% of the time; but the remaining ~5% divergence offers opportunity for uncorrelated returns, sometimes up to ~12 basis points, when captured around events like inflation or jobs data releases.
- Susquehanna has been publicly acknowledged as providing liquidity on Kalshi, receiving favorable trading terms for that role.
- Prediction market volumes rose from under $100 million per month in early 2024 to over $8 billion per month by December 2025, showing rapid growth in liquidity.
- Compliance concerns persist: macro funds report struggle to incorporate contracts on politically sensitive or geopolitical outcomes due to regulatory ambiguity; Neudata’s research head noted macro managers aren’t yet including odds for events like a Chinese invasion of Taiwan.
- Kalshi has secured CFTC-regulated status for many event contracts and has been legally affirmed to issue political event contracts following favorable court rulings.
- Arbitrage opportunities exist: identical or similar event contracts trade at different odds across platforms, enabling strategies that exploit price spreads.
- Firms like DRW, Susquehanna, and Tyr Capital are hiring roles focused on prediction market trading, often with base salaries reaching ~$200,000, reflecting serious institutional commitment.