Hedge funds are beginning to utilize data from prediction markets to shape their investment strategies.

Historically, hedge funds have been reluctant to engage with prediction markets due to the challenges associated with trading on platforms like Kalshi and Polymarket.

These platforms often lack the depth necessary for larger bets on macro developments, and getting approval from compliance teams can be difficult.

However, proprietary trading firms such as Susquehanna have begun to explore these markets. The key attraction for these firms is the data generated by prediction market platforms, which is used to inform their investment strategies, reports the Insider.

Following the trend of monitoring retail traders’ discussions on Reddit forums after the GameStop incident in 2021, funds are now analyzing data on activity on platforms like Polymarket and Kalshi. These platforms offer a free data feed on trading volumes and have partnered with exchange and clearing house Intercontinental Exchange and Dow Jones to create additional data products for funds.

Companies like Dysrupt Labs are developing products using prediction market data. Dysrupt’s CEO, Karl Mattingly, told the outlet that the data from prediction markets often aligns with the consensus from traditional sources, offering traders a chance to profit from deviations.

Despite the potential, the novelty of these platforms means hedge funds are still determining the most effective ways to utilize this data. 

Daryl Smith, head of research at data consulting firm Neudata, pointed out that macro managers are not yet incorporating prediction market data into their models.

Why It Matters

The shift towards using prediction market data represents a significant change in hedge fund strategy. This data offers a new perspective on market trends, potentially giving funds an edge in their investment decisions.

However, the novelty of these platforms and the challenges associated with their use means that the full potential of prediction market data is yet to be realized.

As hedge funds continue to explore these platforms, the impact on their strategies and the broader market will be closely watched.