Overview
Institutional investors and risk managers are incentivized to accurately identify market developments; conversely, market commentators are incentivized to increase view-count through interesting content and must answer to program producers.
Major Development
This past election season has been a game-changer in many ways. From our perspective, one of the most interesting outcomes is the maturation of the prediction markets, which were both more accurate and more timely than the traditional polling markets for determining likely outcomes from the election. Per the WSJ¹:
The 2024 election was a resounding victory not only for Donald J. Trump but also for prediction markets like the crypto-based Polymarket, which allow users to trade contracts that pay out based on the outcome of future events.
By the morning of the election, Polymarket showed $1.8 billion in trading volume on who would win the presidency (Trump at 62%) and an additional half billion on who would win the popular vote (Harris at 73%).
Developments
Several platforms have evolved to the point where they offer a credible means to take positions on various market developments. Several major developments facilitated the emergence of the platforms:
- The continued maturation in the blockchain market
- A more favorable view from regulators
- The connection of international markets
Interestingly, the most popular election betting markets, Polymarket and Kalshi, are relatively newcomers. One can expect increased competition from, or consolidation with, the incumbent online sportsbooks, namely Flutter Entertainment (owner of FanDuel) and DraftKings.
Implications
The implications of this development are vast. First, we expect the prediction markets will expand to a wide variety of areas that are relevant to sophisticated investors and risk managers. Want to know the impact of an impending hurricane? The markets will shortly have it. How about the chances that the Ukraine War will end in the next six months? What about a bill passing Congress? Essentially, nearly any major development is likely to have a robust market. In a sense, the views of market investors can more easily manifest compared to conditions several years ago. Just as risk managers turn to futures, options, and other contracts, perhaps betting contracts can offer a hedge against event-associated risks.
Some Perspective
While there is little doubt that the platforms will be increasingly relevant, the introductory table indicates that the most effective predictors are those who use the most effective tools and adjust positions accordingly.
Utility
We are still sorting through how to use evolving tools such as Polymarket and look forward to seeing how to integrate them with their impact on classes and individual issuers (stay tuned).