How hedge funds are tapping prediction markets and their data for an edge

"Trading on platforms like Kalshi and Polymarket specifically is often not worth it for many funds, which require deeper markets to make bigger bets on macro developments and would likely struggle to get their compliance team's sign-off on using these platforms. While some proprietary trading firms are now dabbling in the space, including Susquehanna, which posted job openings for prediction market traders, the so-called smart money's interest is focused more on the data being generated by these platforms to help inform their bets."

"Similar to the rush to track retail traders discussing stocks on Reddit forums after the GameStop phenomenon in early 2021, funds are, at the very least, ingesting data on activity on platforms like Polymarket and Kalshi. And these platforms make it easy, with a free data feed on trading volumes. Polymarket has also signed partnerships with exchange and clearing house Intercontinental Exchange and Dow Jones that will likely produce more data products for funds to use one day."

"Data companies and forecasting firms have also started building products using the exhaust of prediction markets. Dysrupt Labs, an Australian data and forecasting company that works with hedge funds and family offices, pulls prediction market data into its internal algorithms to decide if the "informed minority" is in line or drifting away from the consensus expectations, said Karl Mattingly, the firm's CEO."

Prediction markets such as Kalshi and Polymarket have attracted attention but offer limited liquidity for hedge funds, which generally avoid direct trading. Proprietary trading firms are beginning to participate, but most institutional players value the markets' data feeds to inform macro bets. Free feeds and partnerships with Intercontinental Exchange and Dow Jones make prediction-market activity easy to ingest. Data firms and forecasters build products from the markets' transaction "exhaust", using signals from recurring economic releases to detect when informed minorities drift from consensus expectations. Compliance and market depth constraints limit larger funds' direct participation, pushing them to rely on these signals alongside other research inputs.

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