Hedging

Hedging is the use of prediction market contracts (or other financial instruments) to offset financial risk from an uncertain event. Unlike speculation, where a trader seeks to profit from a predicted outcome, hedging uses market positions to reduce the net impact of an adverse event on their overall financial position. This is one of the primary regulatory justifications for allowing prediction markets under US law — they serve a genuine economic purpose.

Practical examples of hedging with prediction markets include a media company buying contracts on an election outcome to offset advertising revenue losses if their preferred political environment doesn't materialize, or a business that buys "CPI above 3%" contracts to hedge against inflationary cost increases. Kalshi has specifically designed its product around hedging use cases, marketing event contracts as risk management tools analogous to traditional financial derivatives.

The CFTC's framework for approving prediction markets requires demonstrating that a market serves an "economic purpose" — which hedging clearly satisfies. This is one reason why economically oriented event contracts (interest rate decisions, economic data releases) have faced less regulatory resistance than purely entertainment or political markets. The 2024 court decisions allowing Kalshi to offer election contracts extended the definition of what constitutes a legitimate hedging instrument.