Waterhouse VC, the gaming and wagering-focused venture capital fund led by Tom Waterhouse, has published its August 2026 newsletter examining how businesses can use prediction markets to hedge operational risks.
Since its inception in August 2019, Waterhouse VC has achieved a net total return of +2,948%, representing an annualised return of 63.5% per annum as at 31 July 2026, assuming reinvestment of all distributions.
The newsletter centres on a key question facing the prediction market industry: whether tradeable event contracts can function as genuinely useful commercial hedges for real businesses.
A Los Angeles ice-cream shop called 28 Wishes illustrates the concept, reporting that sales fall by roughly 20% when temperatures drop below 70°F, prompting its owners to bet around $20 a day on Kalshi weather contracts.
The shop reports profits of up to $1,500 a month from those positions, though the hedge is described as imperfect due to what traders call basis risk.
Basis risk occurs because the contract settles against temperature at a selected weather station, not the shop’s actual sales figures, meaning payouts and real-world losses may not align cleanly.
Waterhouse identifies the gap between a tradeable contract and a genuinely useful hedge as the core commercial opportunity, pointing to firms that can connect business exposures with appropriate contracts and specialist capital.
Kalshi currently advertises more than 8,000 live markets, and Reuters reported $27 billion of trading on the platform during the 2026 World Cup, demonstrating the growing scale of prediction market infrastructure.
The newsletter walks through a practical example involving a New York bar facing a potential $50,000 profit loss if the Knicks miss the conference finals, showing how event contracts could theoretically offset that exposure.
At a price of $0.20, purchasing 62,500 “Knicks miss” contracts would cost $12,500, and if the team were eliminated, those contracts would pay out $62,500, producing a $50,000 gain before fees.
Susquehanna’s Jeremy Maletz was cited in the newsletter, noting in June that his firm could quote tens of millions of dollars of risk in a contract with only around $100,000 of past trading volume.
That capacity depends on the market’s price discovery and the firm’s own pricing confidence, suggesting specialist market makers can supply far more liquidity than historical turnover figures imply.
Capital constraints remain a real challenge, as standalone Kalshi event-contract positions are generally collateralised against their maximum possible loss, tying up funds until settlement occurs.
Settlement reliability is another concern, with the newsletter referencing an April 2026 incident in which abrupt temperature jumps at Paris Charles de Gaulle Airport settled profitable Polymarket positions, after which Météo-France filed a police complaint alleging interference with an automated data-processing system.
A July CFTC staff advisory reinforced that registered exchanges should identify settlement sources before listing contracts and carefully assess their reliability, objectivity, and resistance to manipulation.
Waterhouse argues that software-led intermediary platforms, capable of using a business’s operating data to estimate exposure and recommend hedge sizes, will scale more efficiently than traditional advisory models.
Waterhouse VC is already working with White Swan Data on a prediction-market strategy that provides liquidity on regulated exchanges, with an initial focus on sport.
The firm expects specialist teams to emerge around individual risk categories as commercial demand develops, given that pricing edge and underlying data do not transfer automatically between sectors.
The newsletter concludes that the core commercial opportunity in prediction markets is building the underwriting, distribution, and capital needed to turn event contracts into practical, reliable hedges for real business risk.
