Analysis of Reddit-Discussed Event Contract Arbitrage Strategy Outperforming ML Models

The analysis is based on a Reddit post [13] where a user shared a simple event contract arbitrage algorithm generating 31% returns since October 2025, outperforming their complex ML model (14%). The strategy targets gaps (>5% threshold) between binary event contracts (e.g., Fed rate cut likelihood) and Fed funds futures, closing positions 24h pre-event.

Event contracts are binary instruments traded on CFTC-authorized platforms like Kalshi, CME [1,3]. Fed funds futures reflect Fed policy expectations [7]. Inefficiencies persist due to non-overlapping trader pools: event contract traders (retail/speculators) vs derivatives traders (institutions) [10,11].

• Simplicity beats complexity: A 4-hour algo outperformed years of ML development, highlighting niche market inefficiencies [13].
• Fragmentation drives gaps: Distinct trader groups using different data sources maintain price discrepancies [11].
• Short-lived opportunities: Comments suggest the strategy may stop working by Monday (Nov24), aligning with arbitrage theory [2,13].

• Risks
  : Binary contracts carry all-or-nothing risk [1]. Strategy sustainability is low as adoption grows [2]. Transaction costs may erode returns [3].
• Opportunities
  : Upcoming events (Dallas Fed Manufacturing Nov24 [9], UK Budget Nov26 [8]) could present temporary gaps.

• Performance: 31% (arbitrage algo) vs14% (ML model) since Oct [13].
• Mechanism: 5% gap threshold between event contracts and Fed funds futures [13].
• Platforms: Regulated options include Kalshi, CME [3].
• Comments: Inefficiency will vanish quickly (score9), stop working by Monday (score6) [13].