I tried to start a hedge fund that invests in bets on elections.

Investors want things that are completely uncorrelated to the stock markets.

When markets crash, all assets tend to go down at the same time. And even when they don't crash , many asset classes are correlated: stocks, bonds, gold, crypto, oil, housing, etc.

When I say "correlated", that includes when they are reverse correlated. Like Bonds might go down when Stocks go up. Etc.

It's very difficult to find uncorrelated asset classes.

IN the 1990s "viaticals" were uncorrelated to the stock market.

Hedge funds would buy the life insurance policies of people suffering from AIDS. They would calculate the average life span of someone with AIDS and offer an amount for their life insurance that would give the hedge fund, on average, a 20% return.

As "AIDS cocktails" developed, extending the lifespan of people with AIDS, these hedge funds went out of business.

You need three people:

A) a person who has inside knowledge of elections

B) a person who can execute the "trades" (i.e. place the bets "intelligently" and I will describe what that means in a second)

C) a person who can raise money.

These are three very different skill sets and you need someone for each one of these positions.

A fourth position might be a head of risk management but let's presume the second person can handle that task.

The 2022 elections are coming up. There are various websites, for instance Predictit.org, that lets you bet and make money on the elections.

On predicttit, a bet (e.g. "Democrats will keep control of the Senate after the 20222 midterm elections" will be priced between 0 cents and 100 cents.

If it's priced at 60 cents, it means people think the Democrats are somewhat likely to keep control of the Senate. If you buy 1 "share" at 60 cents and the Democrats keep control then you get $1 back after the elections. A return of 66%.

You can also take off your bet . For instance, in th above example, if polls show the Democrats are overwhelming favorites then to make the same bet might move from 60 cents a share to 80 cents. So rather than wait for the elections it might be prudent to exit that bet and pocket a 20 cents (33%) profit.

You can also bet "No" on a bet. So if I bet "No" on the above bet and the "Yes" is priced at 60 cents. then the "No" will be priced at 40 cents. If I bet No and the Democrats lose control of the Senate then I would get $1 the day after election day, or a 60 cent profit.

There are some people on Predicit who apparently make a living making election bets and they use a variety fo strategies.

Here's three strategies I would consider using.

A) Inside information. There's no such thing as insider trading on election betting. I have a podcast where I often interview and talk to people who have much better access to data and "secret polls" then are published by the media. If you can enlist people who are in the campaign business to provide you information or partner with you in a hedge fund you will be very successful.

B) Arbitrage bets: Here's an example of two trades that are a type of arbitrage ( you go "No" on one trade and "Yes" on the other and you can lock in a profit).

- The bet: Republicans will take over the House is priced at 79 cents.

- the bet: Kevin McCarthy wil lbe Speaker of the House is priced at 72 cents.

Unless Kevin McCarthy (the top republican in the House) dies by Jan 20, 2023, this is actually the same bet but priced out of whack.

You make two bets to arbitrage this:

1) You bet $1000 worth of "No" that the Republicans win the House at 79 cents.

2) You bet $1000 worth of "Yes" that Kevin McCarthy becomes Speaker of the House.

If McCarthy doesn't have some freak accident, you will make 7 cents on this bet guaranteed since they are essentially the same bet.

OR, ,if you want to make a directional bet (not arbitraged or hedged) you just bet on Kevin because it's 72 cents and not 79 cents so you would make more money.

A smart bettor can find many examples like this on all the political betting markets.

You want a market that is inefficient or irrational.

There are two reasons betting markets for politics are irrational:

A) people bet on who they want to win instead of making the best bets.

B) sometimes these markets are manipulated by politicians because people think they are more accurate than polls.

C) Also they are irrational because there is less accurate public information. Polls are often very wrong. In 2016, for instance, the polls ignored the fact that there were "Shadow" Trump supporters who didn't want to say they were voting for Trump.

A) Small, but very asymmetrical bets.

For instance, the bet, "Will Xi Jinping be re-elected as general secretary of the Chinese Community Party before January 1, 2022." The price is 95 cents. So you can make a 2000% return if you bet "No", which is priced at 5 cents.

Considering the recent rumor that he was under house arrest, one could make a tiny bet on "No" here. If you make many similar bets, and keep them all tiny and only one comes through you can have good returns.

B) Lock bets.

For instance, if you bet on "Democrats will win the NY Governor's race" the bet is 89 cents. It's almost a lock but since it's 1 month away still, nobody feels like bidding this up to 100 cents. The Democrats will 100% win unless some weird thing happens.

So betting on several of these and trying to find as low a price as possible, is a good strategy. Particularly if you can use leverage so bet twice the amount or more of your fund size.

Even a bet at 90 cents that lasts for one month is an "annualized return" of about 120%. Because the election is 1 month away, the return would be 11% roughly and multuply by 12. This isn't the exact math but you get the idea.

One more approach is to bet on different time frames. For instance, making a bet now on the 2024 election is one way to diversify time frames.

Except for one thing (explained below), it is not difficult.

- it's uncorrelated to the market

- the market is irrational so easier to exploit anomalies than the stock market (if you have justification for saying you have an edge)

- the returns can be significantly higher than the stock market

I present this idea because I have tried to set this up as a hedge fund. But there is one critical problem which I can't solve.

To raise a decent size (acutally, this would be tiny) hedge fund you would need at least $100 million. This is doiable.

HOWEVER, It's not possible to find any place where you can put $100 million to work on political bets. On Predicit, the max money per bet is about $850 I think. Las Vegas doesn't do political bets. And other betting sites are also small.

So that's the end of that idea until some place like Las Vegas starts taking bets.