HedgeStreet

Kojo pointed out HedgeStreet to me the other day. It’s a fascinating business model. It’s a futures market for all sorts of financial predictions. They are regulated, so you have some assurance you aren’t getting scammed. I just saw this site for the first time today, so do your own research before trying it out.

Here’s how it might work. If you think the Consumer Price Index will rise, instead of having to buy an S&P futures contract as a proxy for the CPI, you can take a position on the CPI itself. That’s very neat. But that’s only the beginning. They have a variety of new types of “Hedgelets” as they call them which are new types of futures contracts. Their contracts are between $1-10 so you can take a lot of small positions if you want(though the transactions have a $5 minimum fee so you almost certainly don’t want to).

But that’s not the best part. The best part is that you can apply to be a market maker and create new types of Hedgelets for lots of different things. I am really kind of curious how that works, so I might send them an email asking them about it. You are required to open an account and have positions open both buy and sell side, but that’s about all they say. I have to assume that there’s a significant set of limits on the things you can create markets for. And they mention a fixed spread, so I am guessing that there’s a cap on the size of the spread.

It’s a unique and interesting business model but it has a couple of things to think about. First, they are regulated, so compliance and securities laws are going to be a constraint on some of the things they can do. Second and the bigger issue is building a market. They could be the next eBay, or they could be the next dot com failure. If they can build a reasonably sized market quickly, then they could grow into a megamarket where you shop for all your securities needs or hedge against a precipitous drop in value of your house.

For instance here in the bay area it’s pretty common for people to have a disproportionate amount of net worth tied up in a house. A lot of people have $150-200,000 of equity in their homes that they can’t really tap into. Taking out a home equity loan would help, but in the event of a crash in housing prices, then now you have a bigger problem because you have to repay the loan with something that is worth much less than before. It would be great if you could place a hedge against that crash by taking a position so that if the housing market crashed, you could minimize your losses. Hedgestreet is a long way from being able to do this in exactly a way that I would want to do it, but I can see the potential.