My half-joking potted history of business is that people used to go to business school to learn how to run businesses, and then they would graduate and run businesses. They’d take over their family business back home, or climb the ranks at a big company. This was good, because it was good for businesses to be run well by smart, hard-working professionals who were familiar with best practices for management and capital allocation.

And then finance became a more important part of the economy, and people who graduated from business schools decided to go into finance instead. Finance is a sort of meta-business, a layer of abstraction on top of regular businesses, so it creates leverage: Instead of working at a company and figuring out whether to build a factory or how to price a product, you could work at a hedge fund and allocate capital to dozens of companies that are good at building factories or pricing products. Over time, this makes businesses better and more efficient: You allocate capital to the good ones, the bad ones get starved of capital and go out of business, and we asymptotically approach nirvana.

On the other hand not everyone can be a hedge fund manager. Someone has to build the factories and price the products. You can’t tilt too far in the direction of finance, or else everyone who is good at business will spend their days allocating capital to people who are bad at business. 

One solution to this problem is of the form “actually being good at business is not especially correlated with graduating from a top business school, and people who are good at building factories should build factories while people who are good at trading stocks should trade stocks,” but that is boring. Another, funnier solution is to construct a financial system that:

1. Selects the “best” people in some sort of brutal meritocratic competition,
2. Funnels them into prestigious finance jobs, and
3. Makes it so that those prestigious finance jobs consist of running regular boring companies. “I have arrived at the pinnacle of my career in high finance,” you think, as you sit down to optimize the pricing of your company’s pest-control services.

We talk about this all the time, because this model loosely describes aspects of the modern private equity industry. “Private equity” is an indisputably financial job, and one that you generally get by graduating from a prestigious college and then working at an investment bank for a few years. And private equity funds are mostly in the business of raising money from investors to allocate capital to businesses. But they are also in the business of business: The model is not “give money to good companies” but rather “use money to take over companies that could be run better, and then run them better.” They are operators, not just capital allocators.

And then we talk about “search funds,” which are sort of the small-scale artisanal version of private equity: You can graduate from a top business school, raise some money yourself, and go out and buy a single pest-control company. Then you run the pest-control company. “What are you up to these days,” your classmates ask at your fifth Harvard Business School reunion, and you answer “I’m a search fund operator.” “Oh cool,” they say. You are an allocator of capital, a purchaser of undervalued businesses. Also you are in pest control.

I suppose a hybrid model is: You work at a big private equity fund, you run some big buyouts of big companies, but you find this unfulfilling and/or you don’t make as much money as you want, so you leave the big private equity fund to go find a pest-control company to call your very own. Instead of running a fund, you raise money from investors for each individual deal: You come to them with a business to buy, and they give you the money to buy it. This is, approximately, the “independent sponsor” business. Bloomberg’s Allison McNeely and Preeti Singh report:

Firms that take the single-deal approach — known in the industry as independent sponsors — are surging in popularity.

It’s a way for employees at big private equity and advisory firms to strike out on their own, rather than wait for the current crop of senior partners to make room at the top for the next generation. For investors who’ve chafed at the slow pace of returns from buyout funds, it offers the hope of quicker paydays. ...

Independent sponsor Altaline Capital Management was launched last year by mid-career veterans of TA Associates, H.I.G. Capital and KKR, spurred by a slowdown in deals and fewer opportunities for career advancement, according to Rafael Telahun, a managing director.

“For folks who are in a hurry, those moments serve as a bit of a push,” he said. In turn, the “pulls” were the volume of deals to be done in the lower middle market and the growing number of investors willing to finance those transactions, he said.

Altaline is not actually in the pest control business, but it is in the elevator maintenance business, and has also been in the homeowners’ association management business, another classic. And there is a general focus on applying private equity skills to low-hanging fruit:

Many independent sponsors are investing in deals that generate $2 million to $10 million of adjusted earnings, according to a report from advisory firm Citrin Cooperman. ...

In some ways it’s just about going back to basics: Find a founder-run business that has room to grow, pull together a small syndicate of equity and debt investors, and buy it at lower valuation and with less leverage than what’s typically used in larger deals. A growing number of baby boomers who founded businesses are looking to retire, and the smallest end of the private equity industry provides ready buyers.

Right, the deep purpose of finance is to replace the founder-owners of successful small businesses with skilled professional managers. If Harvard Business School had a career fair in which hundreds of successful retirement-age plumbers and elevator maintainers sat at little tables looking for bright young whippersnappers to take over for them, the students would not show up. The students want KKR, not elevator repair. But the invisible hand of the market works in mysterious ways, and sometimes it transforms KKR associates into elevator repair executives.

Stereotypically, the way sportsbooks make money is with parlays. If you want to bet that the Mets will win tonight, a sportsbook will take your bet and will charge you about a 4% expected edge. [1] If you want to bet that the Mets will win tonight and that Francisco Lindor will hit a home run and that Bo Bichette will get at least two hits and that A.J. Ewing will hit a triple and that Carson Benge will steal a base, the sportsbook will happily take your money, give you a huge payout if all of those things happen, and keep your money if any one of them doesn’t. The sportsbook’s edge on that bet will be more like 20%. That is a worse bet for you: The house has more edge. But the payoff for you, if you win, is much higher, so it might be more fun for you. You are betting for fun. So parlays are a perfect product, popular with bettors and lucrative for sportsbooks. 

One reason that parlays are lucrative for sportsbooks — that they have higher edge than regular single bets — is that they are riskier: If a bettor hits every leg of a parlay, the sportsbook is out a lot of money. But another reason is that they are less competitive than single bets. If you want to bet that the Mets will win tonight, you can log into a bunch of sportsbooks, see what odds they are all offering, and choose the best bet. This tends to push every sportsbook to offer similar odds. But if you want to bet some complicated 10-leg parlay, that is not a product that is listed on the sportsbook’s homepage. The sportsbook gives you some menu to construct parlays, and you construct the parlay you want, and then the sportsbook’s model prices it. You could do that on multiple sportsbooks and pick the best price, but (1) it would be a pain and (2) different sportsbooks might offer different options for bets that you could combine in a parlay, so that the more complicated parlays might not be entirely comparable between sportsbooks. If complicated parlays are bespoke products only offered by a single sportsbook, their pricing will be less competitive.

Kalshi is a US federally regulated prediction market, which is a new kind of sportsbook, but in this respect it is just like other sportsbooks: It offers parlays, the parlays are popular, they have a huge house edge, they lose a lot of money for bettors and they are an increasingly dominant part of the business. Bloomberg’s Justina Lee and Carolyn Silverman report:

Combo bets have become the fastest-growing corner of the prediction-market world since first showing up late last year, representing 36% of the contracts traded on Kalshi this month.

They have also been among the most dangerous for ordinary customers: bettors on Kalshi’s app and website have lost a net $294 million on its combos since the start of the year excluding fees, according to a Bloomberg analysis of the so-called taker trades that mimic the bets made on traditional sportsbooks.

The losses on these sorts of wagers used to be largely captured by sportsbooks, where parlays have been among the industry’s most profitable products. Prediction markets are changing that dynamic by promoting similar trades to their small-time customers on their apps, while allowing Wall Street firms and other algorithmic traders to step in as counterparties.

Yes, right, the sports gambling business is absolutely about promoting parlays to retail bettors, and Kalshi is in the sports gambling business.

But Kalshi is an interesting sportsbook in that it does not take the other side of customers’ bets. In theory, it is a peer-to-peer market; anyone can take the other side of anyone else’s bets. If I want to bet on the Mets, Kalshi will pair me up with someone who wants to bet against them, with no house sitting between us and capturing a spread. In practice, there are market makers on Kalshi, who are largely professional algorithmic trading firms; the “house edge” is bid/ask spread, which seems to be about 1% or 2% for the Mets game.

But what about parlays? It is one thing to match up someone who wants to bet on the Mets with someone who wants to bet on the Braves. How do you match up someone who wants to bet on the Mets and Ewing hitting a triple and etc. etc. etc., some custom multi-leg selection from a vast menu of possible combinations, with someone who wants to bet against that particular combination? Well, a trader can sign up to be a parlay market maker. The retail customer constructs a parlay, and then Kalshi sends it to market makers to price and trade it. Lee and Silverman:

After a customer submits a combo, market makers on Kalshi generally get about a second to offer their best price in a mechanism known as request for quotation, or RFQ, with the winning market maker matched with the customer. (It’s akin to the system with the same name used to trade bonds and typically less liquid securities on Wall Street.)

Pricing parlays is so difficult that many RFQ market makers are happy minting profits by pulling the odds from sportsbooks. Lately, though, competition has become fiercer, so market makers have to figure out where they can afford to drop their price to win trades, says Gianni Settino, a 36-year-old software engineer in Los Angeles.

“If everyone’s using the exact same algorithm to come up with a price, you’re never going to reach the user because you’re just at the same level as all the other market makers,” said Settino, who started responding to RFQs as a side hustle. “You have to find spots where you can be more competitive.”

The one-second RFQ process probably requires a certain level of professionalism and computer infrastructure, but it is not strictly limited to big institutional firms. Some independent professionals can make a good living selling parlays:

Leonidas Mastrokostas, a 26-year-old Jersey City resident, learned about the opportunity when he worked at FanDuel, one of the biggest sportsbooks. He has since struck out on his own, and he says he has been making seven figures a month by betting against the risk-taking instincts of ordinary gamblers on Kalshi.

“These lottery tickets are what retail is really looking for,” said Mastrokostas. “They don’t quite understand the pricing, but at the end of the day, given the competition of many makers there, they’ll ultimately lose less.”

And of course regular sportsbooks have skill at pricing and trading parlays, and they can do it on Kalshi too:

Mastrokostas’s old employer, FanDuel, is also embracing the opportunity. Parlays already account for an outsized portion of the profits on its traditional sportsbook. But FanDuel has recently started market-making combos on other exchanges as well.

A few points here. First: This is cool? I mean, it’s not necessarily great that hundreds of millions of dollars are being extracted from retail bettors with long-odds sports parlays on a US national commodity futures exchange. But if that’s gonna happen anyway, it’s sort of cool that some of those millions of dollars are being extracted by independent hobbyists, not institutional sportsbooks. A traditional sportsbook won’t let quasi-retail bettors take the other side of parlays as a side hustle, but Kalshi will.

Second: My prediction markets white whale is something like “a sports gambling exchange-traded fund that has a systematic positive-expected-value strategy.” We talked a few weeks ago about a proposed sports gambling ETF that would be actively managed by a professional gambler, who would try to pick undervalued bets on Kalshi: Possibly a positive expected value, but not systematic or transparent. I half-jokingly proposed an alternative idea, a sports gambling ETF that just bet on the Mets every day or whatever: Very systematic, and possibly a fun gamble, but obviously negative expected value. But what I really want is something systematic and plausibly good. As I wrote:

The rough shape of the idea is: “Certain bets are systematically mispriced for retail supply and demand reasons. For instance, people might not want to make straight-up bets on heavy favorites in college football: Betting $2,000 on the favorite to win $100 is no fun, while betting $100 on the underdog to win $2,000 is fun. Therefore, taking the unpopular side of this bet should offer a positive expected return. An ETF that systematically bet on huge favorites could have positive returns with no correlation to the stock market.” We have discussed a guy named Mike Wohl, who actually ran a fund doing that for a while in the early 2010s, though that was back in the dark ages before sports bets traded on regulated US commodities exchanges. Now you can do these sorts of bets on Kalshi.

(Similarly, we have discussed a few times a prediction-market strategy of the form “bet No on everything, because the public is systematically biased in favor of stuff happening, so No offers positive expected returns.” Again, this is the sort of thing that could be systematized in an ETF.)

“Taking the other side of parlays” has sort of that shape, and also like 20% edge. It is not as systematic as betting huge favorites, though; it is an active algorithmic correlation-trading business. Still, if the ex-FanDuel guy can make seven figures a month doing it in his personal account, maybe he could start an ETF?

Elsewhere in parlays, a reader sent me this Polymarket contract on “Nothing Ever Happens: 2026,” which is currently priced at about 75 cents and pays out $1 if like a dozen weird salient things (China invading Taiwan, Trump acquiring Greenland, Jeffrey Epstein being discovered alive, a major meteor strike, etc.) don’t happen, or $0 if any of them do. I have no idea if this is a positive expected-value trade, and it’s fairly small volume, but isn’t it sort of tempting as an ETF? 

It’s a little reminiscent of the autocallables ETF we talked about a while back. An autocallables ETF is approximately in the business of selling insurance against a market crash; it collects a nice premium if things are normal and loses a lot of money if the market collapses. This contract has a 33% return if an assortment of catastrophes don’t happen, and a negative 100% return if they do. You could imagine some sort of rolling no-catastrophes ETF that lets investors sell more general insurance to the market.

One of my rules of thumb is that most cannabis companies used to be gold mining companies. That’s probably not literally true, but it’s a useful model. There are some small publicly traded US companies that are constantly changing their business models, and they tend to change to whatever business model is hot at any particular time. Gold mining, cannabis, crypto mining, Covid protective gear, a series of fads. Possibly this is because the managers of these companies have an unusually diverse range of skills and interests that happen to line up with whatever the hot opportunities are at any time. But it is also possible that what they are mostly good at is selling stock, and the way to sell stock to retail investors is by saying the latest hot buzzword. Possibly not all of those companies were good at finding gold or distributing cannabis or making Covid protective gear.

Last year’s fad for digital asset treasury companies was actually quite nice for all of those constantly pivoting companies:

1. There was a tremendous demand for small underutilized public companies, so they could all become DATS.
2. Becoming a DAT was very good for one’s stock price: If you put $100 million of crypto into a small public company, it would be worth $200 million, for a while.
3. You didn’t have to do anything else. The whole schtick was selling stock at a premium to buy crypto; you could say some words about building a new digital ecosystem, but nobody cared very much. Being a cannabis company might eventually require some tedious growing and distributing of cannabis, but being a digital asset treasury company was essentially about selling stock. It really suited the companies’ skill sets!

The problem is that the fad ended and now DATs do not trade at a premium. So they need to pivot back to something else. And there’s nothing else like DATs, where “we sell stock at high prices” was the entire business model. Now you have to pivot back to doing real things, or saying that you’ll do real things anyway. Bloomberg’s Monique Mulima reports:

The implosion of the once-hot market for cryptocurrency treasury stocks is prompting a number of firms to pivot to artificial intelligence in an attempt to win back investors. So far, it isn’t working.

K Wave Media Ltd., a former Bitcoin accumulator that shifted to data center development, has seen its shares fall 71% since rebooting in May. Lixte Biotechnology Holdings Inc.’s shares have fallen 33% since agreeing to merge with a battery firm in June. And AlphaTON Capital Corp., which held alternative cryptocurrencies, has dropped 33% since it rebranded as Alpha Compute Corp. in April.

We talked about another one, Empery DIgital Inc., a few weeks ago. Maybe they’ll all be really good at AI!

If you are an executive at a big company, and you go to an off-site retreat with other executives, and at this retreat they do a “Vulnerability-Trust exercise” where they ask you to confess your deepest secrets to build trust with your colleagues, what you do is, you give a long sigh, you stare into space, a tear comes into your eyes, your lips quiver, and you say “you know, I’ve never told anyone this, but I feel like I can trust you all, so I’m just going to say it: Sometimes I’m too much of a perfectionist.” And then you break down in tears and there’s a group hug.

That is not actually career advice but if you tell people you’ve used drugs they are absolutely going to use it against you; what are you thinking? The New York Post reports:

A Netflix executive was fired from his $1.1 million a year job after revealing during a “trust exercise” at a work retreat that he had taken medically prescribed ketamine, a lawsuit has claimed.

Kevin Baillie, who was vice president and head of creative at Eyeline Studios, is suing the company after it launched an investigation into his comments that ultimately ended in his firing, the papers say. … 

During what’s called a “Vulnerability-Trust exercise” at a January 2026 retreat at the exclusive Sendero Ranch, a Northern California property owned by Netflix, Baillie shared with his colleagues that he had undergone the treatment, the suit says.

I made myself laugh by imagining this happening at Bridgewater. But, honestly, anywhere, what are you doing trusting your colleagues and bosses?

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