Ohhhhh, you're going to hate this one. This week's Barron's cover story tries to sort out what the presence of prediction markets like Kalshi or Polymarket will do to stock market investing. Some brokerage firms like Robinhood have started to integrate prediction markets onto their platforms.
Robinhood customers can bet on sports outcomes and hold stocks and bonds. For an example of how the prediction market bets work below, looking at a sporting event like tonight's James Madison/Oregon CFP game.
Based on the screenshot, betting on Oregon means risking $0.92 to make $0.08 and if you bet on JMU, you could win $0.92 from your $0.08 bet. You can also bet on various statistics, pretty much anything. This feels like gambling, at least engaging on this level, trying to predict a few outcomes here and there.
Look under the hood at just about any macro strategy mutual fund and you will see hundreds of positions. Same with other alternative strategies, hundreds of holdings with no way to really understand how the fund is actually positioned.
One of the reasons to consider catastrophe bonds is they have no fundamental correlation to anything. The strength of the economy, the outcome of elections nor geopolitical events will have any impact on how strong or weak the hurricane season will be. Cat bonds exist outside of all of that.
I could see where a mutual fund or ETF centered on prediction markets would use some sort of algo or AI to continually make thousands of prediction market bets. It would be like a macro strategy for how much was going on in the fund and kind of like cat bonds, that the number of bets right or wrong would have nothing to do with the economy, the outcome of elections or geopolitical events.
Such a fund would get a lot of predictions (bets) right and it would get a lot wrong. The win rate would be relevant but so too would be the importance of blending "sure thing" bets like Oregon in the above example and long shots like James Madison. The skill would not be in the predictions directly but in the system making and managing the bets. For example, lets say this fund buys James Madison at $0.08 and then JMU jumps out to a 14 point lead midway through the second quarter, the fund could sell the JMU bet for some sort of profit because at that point, JMU's odds of winning would improve. If the JMU side of the bet went from $0.08 to $0.30 mid-game, that would be huge win if sold.
The outcome for such a fund would not be a binary win lose. A good outcome of constantly having thousands of bets as described might look like some sort of absolute or arbitrage like return. To reiterate, if a fund like this ever came into existence, it would bear no resemblance to any of us making a few bets here and there.
The IDX Dynamic Fixed Income ETF (DYFI) popped up via a different Barron's article. When I see an unfamiliar fund, I always try to understand what it is trying to do. If you click through to the fund page, it clearly benchmarks to the AGG but it seems clear it is trying to have a smoother ride versus AGG. "Your bond allocation shouldn't be a source of unexpected risk."
DYFI is a fund of funds.
The small weightings to inverse funds are interesting, there's some thought going into this.
The fund is not static. It looked much different last January.
The fund is clearly making active decisions but for now, it doesn't appear to be adding value. These numbers from Yahoo which probably only go through 11/30 aren't so hot either.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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