Hedge Funds Are Drowning in Prediction Markets – Kalshi vs. Polymarket Explained!

Prediction Markets Go Institutional: Why Hedge Funds Are Watching Kalshi and Polymarket

Prediction markets are becoming increasingly mainstream. New platforms, ranging from traditional financial institutions to those built on cryptocurrency, are giving traders opportunities to forecast the outcomes of events like elections, economic reports, and new product releases. This article highlights where investors are focusing their funds and the reasons behind their choices.

This analysis compares Kalshi, a regulated exchange where you can trade on the outcomes of events, with Polymarket, a popular platform built using blockchain technology. We also detail how investment funds are using these platforms to gain insights, reduce risk related to real-world events, and stay legally compliant.

By the end, you’ll understand the key differences between these two platforms, the approaches institutions are currently exploring, and the common mistakes to avoid when combining probability with how markets actually work.

Quick Answer

Hedge funds are increasingly interested in prediction markets because they allow investors to turn uncertain future events into tradable probabilities, which can be used to reduce risk or potentially earn higher returns. Kalshi is a regulated platform for U.S. institutions to trade contracts on these events, while Polymarket offers a wider range of topics and constant trading activity using cryptocurrency, though it’s generally unavailable to users outside the U.S. The best platform for an institution depends on its specific investment goals, legal restrictions, and existing technical setup.

Kalshi: CFTC-regulated event contracts, KYC/AML, fiat rails, institutional onboarding.
Polymarket: On-chain markets with fast-moving liquidity, wallet-based access, stablecoin collateral.
Use cases: Hedging macro events, harvesting alternative data, cross-market arbitrage.
Key risks: Liquidity gaps, resolution disputes, regulatory constraints, smart-contract or custody risk.

What is pushing prediction markets toward institutional adoption?

Several factors are coming together to create new challenges for investors. Increased uncertainty from events like changing central bank policies, elections, and legal rulings aren’t always well-protected by standard financial tools. Contracts that directly pay out based on specific outcomes – like inflation rates or election results – offer a more straightforward way to manage these risks.

Additionally, the underlying systems for these platforms have become more established. Kalshi is a regulated exchange overseen by the U.S. Commodity Futures Trading Commission (CFTC), which means it follows strict rules, monitors trading activity, limits positions, and has a clear process for finalizing trades. Polymarket, on the other hand, operates directly on a blockchain, offering transparent order information and quick price changes in areas not always covered by traditional exchanges, though U.S. residents generally can’t participate.

Investors are constantly seeking data, and prediction market prices can provide valuable insights alongside traditional options data. For portfolio managers making decisions based on their own judgment, these crowd-sourced probabilities offer a helpful starting point. For quantitative teams, the historical data from these markets – including odds changes and order book information – can be used to improve trading signals, manage risk, and even automate trade execution across various investments.

How do Kalshi and Polymarket differ where it matters for funds?

Both systems allow you to turn simple ‘yes/no’ predictions or numerical forecasts into tradable agreements, but they differ in how they’re regulated, who can use them, what security is required, and how they function day-to-day. These differences are important for investors, as they affect whether a particular system aligns with their investment strategy and how easy it is to use.

Here’s a breakdown of Kalshi and Polymarket, comparing their key features and risks:

Regulation: Kalshi operates as a fully regulated exchange overseen by the CFTC, focusing on permitted event contracts. Polymarket is a prediction market built on blockchain technology and has limited access for U.S. users due to regulatory concerns.

Getting Started: Kalshi requires standard identity verification (KYC) and compliance checks. Polymarket uses wallet-based access and generally doesn’t require KYC for users outside the U.S., but blocks access from within the U.S.

How Funds Work: Kalshi uses traditional banking (fiat currency) and account balances. Polymarket relies on stablecoins (like USDC) on a public blockchain.

Market Mechanics: Kalshi uses a traditional, centralized order book system. Polymarket uses automated market makers and liquidity pools on the blockchain.

What You Can Trade: Kalshi’s offerings are limited by CFTC rules. Polymarket can list a wider range of topics, with faster listing times, but is governed by its own platform policies.

How Markets are Settled: Kalshi relies on its own rules, data sources, and monitoring. Polymarket uses smart contracts, oracles (data providers), and a dispute process.

Data & Tools: Kalshi provides official APIs, historical data, and compliance reports. Polymarket uses public blockchain data, platform APIs, and tools like Dune Analytics.

Key Risks: Kalshi’s risks include changes to regulations and listing rules. Polymarket faces risks related to smart contract security, varying regulations by country, and fragmented liquidity.

As a researcher, I’ve been following the situation with Kalshi, a platform seeking to offer contracts based on U.S. political events. Getting regulatory approval for these ‘political control contracts’ has been challenging, leading to legal disputes. I recommend that institutions closely watch the CFTC’s official statements and any updates from Kalshi itself to stay informed about what types of contracts they are allowed to list and trade, as this is subject to change.

What strategies are hedge funds actually testing?

Teams within established organizations usually begin with small-scale tests to minimize risks or gather initial positive results, instead of making big, uncertain bets. They often follow these approaches:

Macro hedges: Positioning around CPI prints, GDP releases, nonfarm payrolls, or central bank decisions. An event contract might offset a tail move in rates or equities if the surprise hits.
Cross-asset signals: Using prediction market odds to sanity-check or augment probabilities implied by options skew or Fed funds futures. Discrepancies can inform position sizing.
Event-driven pairs: Trading relative outcomes—for example, probabilities of competing tech product launches or regulatory approvals—then delta-hedging with correlated equities.
Breadth of events: Non-traditional events (e.g., crypto ETF flows, protocol upgrades) can serve as scenario indicators for digital asset books.

Certain investment funds try to profit from price differences for the same event on different platforms like Kalshi and cryptocurrency exchanges. This involves buying low on one and selling high on the other, but it requires careful handling of legal, practical, and currency-related challenges. Other funds use the odds offered by these markets to help their internal teams assess risks before important events happen.

These tools are valuable for both seeking investment gains and managing risk. For teams focused on limiting losses at specific times, directly buying or selling the *chance* of a certain outcome is a simpler and more effective approach than trying to create similar protection using options or swaps.

How should institutions think about liquidity, pricing, and execution?

Prediction market trading volume changes a lot depending on the specific event and when it’s happening. You’ll typically see the most activity around key numbers or just before important updates, but it quickly dies down once the event is decided. This can create both good chances to profit and potential pitfalls for traders.

Kalshi’s centralized order book can show firm resting liquidity and tighter spreads in popular markets as events near.
On-chain AMMs can offer continuous quotes but may suffer slippage if sizing is large relative to pool depth.
Liquidity providers dynamically rebalance; odds can gap on headlines, so execution timing matters.

Before making a decision, first determine how much loss you can accept and understand the potential gains and losses involved. Keep in mind that a ‘Yes’ ticket costing $0.60 suggests a 60% chance of success before fees – meaning you risk the remaining $0.40 if the outcome is ‘No’. Consider how this compares to using options or futures contracts to protect against risk in similar situations.

Pre-trade checklist for funds:
Size vs. depth: Can the venue absorb your order without moving the price more than your threshold?
Resolution clarity: Is the event definition unambiguous, with a reliable data source?
Correlation mapping: How does this event’s outcome transmit to your core book?
Fee impact: Model net expected value after trading and withdrawal fees.
Exit plan: If odds move your way early, is there an orderly way to take profits?

Here’s a helpful tip: Don’t take the price you see as a definite prediction. Instead, think of it as a rough starting point. Create a rule for yourself: only make a trade if your team believes the actual chance of success is significantly different from what the market suggests – enough to cover trading costs, potential price fluctuations, and any inaccuracies in your prediction model.

What are the regulatory lines and compliance considerations?

What sets Kalshi apart is its legal status. Because it’s regulated by the CFTC as a Designated Contract Market, it follows U.S. derivatives laws, which includes verifying customer identities, preventing money laundering, limiting trading positions, and having clear rules. This framework makes it easier for institutions to join, monitor activity, and maintain records. However, the types of events Kalshi can offer contracts on are limited by what the CFTC allows, and these limitations can change over time.

Polymarket is a cryptocurrency platform that previously ran into legal issues with the CFTC and now limits access for users in the U.S. Whether someone can use the platform depends on where they are located and Polymarket’s own rules. Companies considering using the platform need to check local laws about things like financial derivatives, betting, and securities. Because of these regulations, many companies only allow their non-U.S. branches to participate in on-chain predictions when it’s legally allowed.

Policies should address issues like unfair market practices, potential conflicts of interest, and the proper handling of confidential information, particularly when these issues involve companies the firm invests in. To demonstrate compliance with both internal rules and external regulations, firms can use things like documented supervisory processes, monitoring of trades, and keeping records of all communications.

This information isn’t legal advice. Organizations should consult with a lawyer and check the latest official rules from regulators like the CFTC before taking any action.

How do these markets settle—and can outcomes be gamed?

How a trade settles is just as crucial as the price itself. On Kalshi, settlements are based on clear rules and official data. If an event happens (resolves as ‘Yes’), you receive $1 for each contract. If it doesn’t, you receive $0. Any disagreements are handled through a documented process, designed to eliminate confusion and ensure fairness.

On-chain platforms use smart contracts and external data sources (oracles) to determine outcomes. Here’s how it usually works: once a specific period ends, a trusted source is checked, and the oracle then reports the result. If there’s disagreement, a staking or voting process can be used to resolve it, but these also have time limits. Although these systems are very transparent, the way the smart contracts and oracles are built introduces its own set of potential problems.

Clearly defining events is the first step in accurately tracking them. For example, if asking whether inflation will exceed 4.0% in June, the specific inflation index to use (like CPI-U, and whether it’s seasonally adjusted), the source of the data, and how any revisions to the data will be handled must be stated upfront. The same principle applies to political markets – they need to clearly identify who officially confirms results and the relevant dates.

Be careful: Unclear wording, conflicting information, or changing rules can easily change the outcome of a bet. Always demand clear, specific conditions before deciding how much to wager, and steer clear of situations where the result depends on opinion instead of facts.

How can a fund build an institutional workflow with data, APIs, and custody?

Begin by gathering data. For Kalshi, obtain their API documentation, past market data, and details about how each market works. Then, create systems to convert prices into probabilities and handle markets when they close. For platforms built on blockchains, use their APIs to collect data. If necessary, directly analyze blockchain records to confirm trade information and assess how much activity there is.

When putting this into action, use different approaches depending on the scale. For small test runs, handle orders by hand and double-check everything before trading. For larger, ongoing programs, use automated systems like APIs or smart order routers. These systems should automatically follow rules about how much you can trade, your risk tolerance, and which trading venues are legally allowed.

As a researcher looking into different trading setups, I’ve found that how custody works really depends on where the trading is happening. For Kalshi, accounts are funded with traditional money and we handle custody within the exchange, with standard security measures. But if you’re trading directly on the blockchain, you need stablecoins, a digital wallet, and a secure way to manage your private keys. Larger institutions usually partner with Multi-Party Computation (MPC) wallet providers or qualified custodians to meet their risk management needs. They also set up withdrawal restrictions and require multiple approvals for any transactions.

When managing the risks of event contracts, it’s best to think of them as simple bets with limited potential profit and loss. Develop risk measurement tools (like VaR) and stress tests based on the all-or-nothing nature of these contracts. Keep a close eye on how much exposure you have to different types of events, and set up alerts to notify you of significant odds changes, especially when key events are approaching.

Common Mistakes

Ignoring event definitions: Trading a headline without reading the exact resolution criteria can turn a “sure thing” into a loss. Always review the rulebook or oracle policy.
Overestimating executable size: Displayed liquidity can vanish around news. Use limit orders, slice execution, and pre-define maximum slippage.
Forgetting fees and carry: Repeated entries/exits and withdrawal costs erode edge. Model total cost of trading into probability thresholds.
Mixing mandates: Political or regulatory markets may be off-limits for certain entities. Align venue and market selection with written investment guidelines.
Neglecting custody/compliance: On-chain strategies without institutional wallet controls, audit trails, or access policies risk operational violations.

If you’re looking for clear explanations and insightful analysis of the crypto and fintech worlds, check out the features and explainers available on Crypto Daily.

Frequently Asked Questions

Can prediction market prices be treated as unbiased probabilities?

While helpful, these prices shouldn’t be taken as absolute truth. They’re influenced by how easily assets are bought and sold, who’s trading, associated fees, and how much risk people are willing to take. When making important decisions, it’s best to combine these market prices with your own data and look at signals from other markets, and always consider a range of possible outcomes.

Are U.S. institutions allowed to trade political outcomes?

Whether or not participation is allowed depends on current decisions from the CFTC and which exchanges list the contracts. Kalshi has encountered regulatory hurdles with some of its political contracts. Therefore, institutions should seek legal advice and refer to official exchange announcements before trading.

How do I hedge a surprise CPI print with event contracts?

A way to protect your investments is to trade options linked to changes in the Consumer Price Index (CPI). If unexpectedly high inflation would negatively impact your portfolio, you could buy an option that pays off if CPI rises above a certain level, effectively offsetting those losses. The amount of this trade should be based on how much CPI changes are expected to affect your portfolio’s profits and losses.

What happens if an on-chain oracle is wrong?

Most platforms allow you to dispute reports and have a limited time to do so, and may even offer rewards for doing so. But there’s still a chance things could go wrong with how information is verified or decisions are made. Keep this possibility in mind when deciding how much to invest and where to trade.

Is there leverage in prediction markets?

Binary event contracts typically offer straightforward payouts. While some platforms might let you essentially bet against an outcome or use borrowed funds, these features aren’t standard and depend on the specific platform’s rules. Always check the platform’s guidelines before trading.

How do taxes work for event contract trading?

How your crypto transactions are taxed depends on where you live and how the specific asset is classified (like a derivative, a bet, or something else). It’s crucial to keep very thorough records and get professional tax advice before you significantly increase your activity.

Can I automate trading strategies across venues?

Absolutely, when allowed. Utilize APIs and automated controls, including checks tailored to each venue, to verify identities and ensure compliance. Make sure any automated processes adhere to listing restrictions, position limits, and your company’s internal rules.

2026-05-28 17:41