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Discussed in this piece:

1) An LA ice cream shop covering 43% of its rent with $20-a-day weather bets on Kalshi

2) The 1997 Enron swap, and why weather hedging stayed institutional for 25 years

3) The hedge-or-trade question behind Henry Harris and Tarek Mansour's exchange

4) Why hedgers are the customer prediction markets keep promising regulators

🖋️ This piece was written and researched by Pet Berisha and Omar El Safy

An ice cream shop in downtown Los Angeles is paying nearly half of its rent with weather bets.

28wishes is an independent parlour run by brothers Jason and James Jiang, with the former a 37-year-old former corporate banker.

Since April, the brothers have been staking $20 a day on Kalshi's climate markets, betting that Southern California gets cold.

"We lose about 20 percent of business when the weather goes below 70 degrees. So we're essentially hedging that profit loss on the app," Jason told the New York Post.

The stake works out at roughly $600 a month. In a good month, the positions have cleared as much as $1,500. Their best single day paid $800.

Rent on the shop is about $3,500 a month, so in a good month the weather positions cover 43% of the lease, and the payouts land on the days the shop is quietest.

This is pretty cool, on the face of it.

Kalshi CEO Tarek Mansour shared the story.

"Weather hedging is not new, but prediction markets make it possible for individuals and small businesses."

History does back that up.

The first standalone weather derivative was written in 1997, a swap between Enron and Koch Energy on Milwaukee winter temperatures. Koch paid $10,000 for every degree above normal. Enron paid the same for every degree below.

CME listed weather futures in September 1999. Utilities, airlines and farms have been buying them ever since.

The market is growing again, too. CME weather derivative volumes rose over 260% in 2023, and open interest sat around 101,000 contracts in late 2024, well above where it was two years earlier.

This offering wasn’t built for those not deploying in size. An ice cream shop paying $3,500 rent isn’t a traditional customer for weather futures.

Since the rise of prediction markets, I’ve been thinking that the word ‘hedge’ has started to lose its meaning.

Henry Harris, on X, had this to say, to back that point up:

"On any long enough time horizon, hedging strategies should break even minus the premium you pay to transfer the volatility risk. So it is a cost."

"If you are making money on your hedge, then you are just speculatively trading negatively correlated markets."

A real hedge is insurance, and insurance is supposed to lose you money over time. You pay a premium in the months the sun shows up, and you collect in the months it does not.

The Jiangs, though, say their forecasts are "scarily accurate". They read meteorology feeds and follow climate scientists on social media to time their entries.

"Up to $1,500" is a best month, and $800 was one very good day, so the 43% is what a good month covers rather than the average.

And this is fascinating. Because through speculation, market makers and forms of liquidity, Kalshi have been able to facilitate the smoothing of cash flow for an independent business.

In May I wrote about the Wall Street Journal's finding that 0.1% of Polymarket accounts take home 67% of the profits.

When the customer is a retail trader, the data is brutal. Most lose.

Hedgers sit outside that maths, because a hedger does not need to beat the market. When the Jiangs lose a contract, the sun is out, and their revenues are strongly correlated with that.

This is the customer prediction markets have been promising regulators. Kalshi claim over 5 million monthly active users and holds a CFTC licence, and they are fighting states like Arizona and Ohio, who want the app treated as gambling.

The industry has cited hedgers in courtrooms for years. And they need more case studies to showcase that this is in fact happening.

In June we covered two of them.

Since April, Kalshi has settled hedges for a football club, a bar and an ice cream shop. But it still feels like a very small piece of the pie, which continues trending upwards in sports wager volumes.

And even the ‘public good’ form factors of prediction markets have their holes.

All prediction markets pay out depending on the resolution from data that oracles ingest.

Weather contracts, for example, could pay out on the reading of a physical sensor.

On the evenings of April 6 and April 15, the Météo-France station at Charles de Gaulle airport recorded temperature spikes of 4°C and 5°C that no nearby station picked up. Traders positioned for the anomalies made roughly $34,000, and investigators suspect a heat source was pointed at the sensor. That heat source being a… hairdryer.

Polymarket moved its resolution source to Le Bourget airport and let the results stand. Météo-France has filed a criminal complaint.

Of course, these are fringe cases of manipulation and prediction markets do tend to move quickly in figuring out how to resolve these markets with integrity. But sometimes, subjectivity reigns supreme.

I mean, at the end of the day, I’m still not totally sure if Zelensky was wearing a suit to his last White House visit.

To conclude;

This is good PR for Kalshi. And it’s good for them to shout at the hilltops about how great this is for small businesses. The idea that SMEs can smooth volatile revenue using a peer-to-peer exchange is genuinely interesting. But I’m unsure if these volumes ever get big enough that Kalshi can point to them in courts, but they are heavily incentivised from a regulatory perspective to show that their exchange is not just sports wagers.

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