I mean. You start a startup with a far-fetched idea like genetically engineering algae to produce clean renewable fuel. You go out to investors to raise money. You say “we are going to genetically engineer algae to produce clean renewable fuel, if we succeed we will make a bajillion dollars, you want in?” The investors think that sounds cool, because it does. But they are responsible investors, they do their due diligence, they ask questions like “is that a thing” and “can you actually produce fuel algae” and “will it be cost-effective?” You do your best to answer their questions.

Do you exaggerate? Oh sure. That is the job of a startup founder. I once wrote▸ AI summary, approximately:

What you want, when you invest in a startup, is a founder who combines (1) an insanely ambitious vision with (2) a clear-eyed plan to make it come true and (3) the ability to make people believe in the vision now. “We’ll tinker with [algae] for a while and maybe in a decade or so a fuel-[producing strain of algae] will come out of it”: True, yes, but a bad pitch. The pitch is, like, you put your arm around the shoulder of an investor, you gesture sweepingly into the distance, you close your eyes, she closes her eyes, and you say in mellifluous tones: “Can’t you see the [algae producing clean fuel oil] right now? Aren’t they beautiful? So clean and efficient, look at how nicely they [float in this pond], look at all those [genes], all built in-house, aren’t they amazing? Here, hold out your hand, you can touch the [algae] right now. Let’s go for a [swim].”

Of course, you are a startup founder; you are in essence a salesperson. Back at the lab, the algae scientists and chemical engineers and accountants are looking at your pitchbook in disbelief. “Wait, you’re telling investors that we can produce the fuel oil now? You’re telling them that we’ll have large profits in two years? Did you not read our latest status report?” The scientists and accountants are boring and conservative; it is their job to try to make the dream work in dreary reality. It is your job to sell the dream now.

What if it doesn’t work? You raise some money, you build some pools, you monkey with some algae genes, you even get some oil out of them, but there’s nothing commercially viable. You shut down the operations and the investors have lost money. Oh well; that’s startups for you. 

Is it securities fraud? Well, that depends on things like how much you exaggerated, and what you exaggerated about (future profits, okay; past revenue, bad), and how much you caveated your exaggerations, and who your investors were, and what you did with the money (algae research, good; buying yourself yachts, bad). My general view is that, in Silicon Valley startup culture, you can get away with a fair amount of exaggeration. Investors want unhinged visionaries who believe in the dream; they’re okay if you get a little ahead of reality. Not legal advice!

Now change the hypothetical a bit. Instead of being the founder of an algae startup, you are the chief executive officer of a gigantic publicly traded oil company. You start a fairly small side project with a far-fetched idea like genetically engineering algae to produce clean renewable fuel. You don’t go out and raise money to do it: You have plenty of money, from selling oil. But you do talk about it a lot, to investors and on television. Why do you talk about it? Well:

• You’ve been talking about oil for your whole career, there’s not that much left to say about oil, but “we will genetically engineer algae to produce fuel” is cool and new. Why wouldn’t you talk about it?
• The oil business is mature and commoditized, and investors might be more excited to hear about some brand-new revenue source with huge potential growth than about drilling more oil out of hard-to-reach places. If the algae work, they might really transform your business.
• A lot of investors are, or at least used to be, interested in environmental, social and governance (ESG) investing, and as an oil CEO you have, or at least used to have, a lot of unpleasant conversations with those investors. “What are you going to do about getting to net zero carbon emissions,” they ask you, and you usually reply “well we’re an oil company so,” and they glare at you. But now you can reply “look, algae.” They might like that!

And so you talk, enthusiastically, about the algae. And back at the lab the scientists grumble. And then it doesn’t work out. Is that securities fraud? Well:

• Just as with startups, it depends on exactly what you said and how you caveated it. If you are a public-company CEO, you are probably better at caveats than most startup founders.
• Unlike with startups, you didn’t raise any money to tinker with algae, so no one was quite as directly harmed by your misplaced enthusiasm. (Sure you spent some company money on the algae, but you spend company money on lots of things that shareholders can’t control; they weren’t misled into giving you the money.)
• But also unlike with startups, your investors are not venture capitalists with a high tolerance for exaggeration. Your investors are public shareholders, and some of them will answer advertisements from plaintiffs’ law firms. If you exaggerate about the algae, and your stock goes down, there is a big pool of investors who might sue you for securities fraud.
• On the other hand, you are a giant oil major and the algae stuff is mostly a hobby. If it doesn’t work out, why would the stock go down? Your company was not primarily a bet on the algae. You’re still selling all that oil.

“Everything is securities fraud,” I often write. If you announce an algae project, and the stock goes up, and then you terminate the project, and the stock goes down, you will get sued for securities fraud. If the stock doesn’t go down, plaintiffs’ lawyers will be just a bit less excited to sue you for securities fraud, because the damages will be counterfactual (“if they hadn’t lied about the algae the stock would have gone up even more”) and harder to calculate.

Anyway here’s a Wall Street Journal story▸ AI summary about how Exxon Mobil Corp. pitched algae enthusiastically, and its scientists were like “slow down there tiger the algae might not work,” and its investor relations team was like “shh, algae”:

The Journal reviewed an internal presentation made in early 2020 by Exxon’s scientists and examined other documents related to Exxon’s efforts on algae. Some of the documents—none of which have been previously reported—show executives knew the $500 million algae research project wasn’t meeting its goals outside the lab, even as they continued to promote it to investors as a potential boon.

Members of Exxon’s investor-relations team and leading researchers exchanged a flurry of communications discussing algae’s low productivity outside the lab and how to highlight the program to investors in the days ahead of the presentation, the documents show.

In public, Exxon was pretty jazzed about the algae:

“Across more than 135 years, we’ve evolved and transformed,” [CEO Darren] Woods told investors in 2018. “From a maker of lamp fuel to a maker of motor fuel, from supplying the Wright Brothers’ first airplane to supplying the space shuttle…from filling tanks with gasoline to potentially filling them with biofuels made from algae. Society’s needs evolve, and so do we.”

Exxon spent $150 million in advertising its algae program over a decade, one of its biggest public-relations campaigns of that time. Starting in the late 2000s, the company ran a nearly ubiquitous series of television commercials touting the potential to produce a biofuel from algae that could one day fuel “trucks, buses, boats, cars, even airplanes.”

“Scientists recognize its potential to change our energy future,” a voiceover says in one of the commercials that began airing in 2017. “By 2025, Exxon Mobil is aiming to have the technical ability to produce over 10,000 barrels of algae-based biofuel per day.”

“Have the technical ability to produce” is good lawyering! That’s different from, for instance, “produce,” or “produce profitably.” Meanwhile the scientists, internally, were bummers:

The scientists explained … that the best strains of algae, when grown in large outdoor ponds, were producing oil at roughly 6% of Exxon’s stated goal.

They further concluded that even if geneticists were able to speed oil production, it would be uneconomical. To produce 10,000 barrels of algae-based biofuel a day, they estimated Exxon would need to build 35 square miles of ponds—an area six times the size of downtown Los Angeles—that would have to process more saltwater than the entire city consumes in fresh water daily. 

The scientists said the cost of the project would be at least $9.4 billion—an unprofitable investment that would well surpass the value of the biofuels extracted.

Anyway it didn’t work. Exxon told the Journal: “Our communications reflected the science as it was understood at the time, and when it became clear the technology would not scale commercially, we ended the program. Any suggestion otherwise is a lie.” Exxon pulled the plug on the algae around March 2023. The stock is up about 50% since then, for reasons unrelated to algae.

Among other things, this story is a time capsule from a time when big oil companies talked a lot about ESG. I feel like, in 2026, if you did find a cheap clean renewable way to produce limitless fuel from algae, you’d keep quiet about it. “We made this fuel by burning coal in a new way that emits extra carbon, promise!” Elsewhere, here is an xkcd about “carbon onsets.”

I feel like the high-level analysis of the modern asset management industry might be:

1. Once upon a time there were mutual fund managers who took money from retail investors, invested it in stocks and bonds and charged 1% fees.
2. Now they have been replaced by index fund managers who buy all the stocks and bonds but charge 0.01% fees.
3. The asset management industry, for obvious reasons (the fees! but also, like, a feeling of self-worth and accomplishment) would like to get back to the olden days, when the fund managers picked the investments and got bigger fees.
4. That ship has, with respect to publicly traded stocks and bonds, sailed.
5. But there are still stock-like things called “private equity,” and bond-like things called “private credit,” that are for the moment not really the subject of investable indexes, so you can charge big fees. Also there are hedge funds, which invest in stocks and bonds and other financial instruments in ways that are complicated and uncorrelated enough not to be lumped in with mutual funds, so they can still charge high fees.
6. Historically you couldn’t charge those big fees to everyone; private equity and private credit and hedge funds were essentially institutional products. You charged a high percentage of assets, but the assets were somewhat limited.
7. Just wait, though.

So we talked yesterday about putting alternative assets (private equity, private credit, crypto, etc.) in retirement funds, because retirement funds are where the money is and alternative assets are where the fees are. And Bloomberg’s Hema Parmar and Preeti Singh report▸ AI summary:

Blackstone Inc. is launching its first hedge fund for affluent individuals, as the $1.3 trillion asset manager intensifies its push to bring alternative investments to doctors, lawyers and other professionals with disposable income to invest.

The new fund aims to make relatively liquid bets, meaning they can be easily sold, across an array of asset classes including credit, equities and so-called special situations — one-off events such as corporate spinoffs or supply-chain disruptions. It will invest about 30% of its assets in other hedge funds, according to people familiar with the matter.

The Blackstone Multi-Strategy Hedge Fund, known as BXHF, plans to start trading this year and is open to investors who meet the requirements for both accredited investors and qualified purchasers, defined as individuals with at least $5 million of investments, according to a filing.

The trillions of dollars sitting in the accounts of everyday investors and so-called mini-millionaires have become a holy grail for alternative asset managers, which have been searching for sources of capital beyond their traditional base of institutional backers.

Like, crudely speaking, there are three things in the world, “mutual fund,” “index fund” and “hedge fund.” There was a cheery equilibrium in which everyone owned mutual funds, but if everyone abandons their mutual funds for index funds, the asset management industry is going to start selling them hedge funds instead.

The approximate theory of indexing is:

• Collectively, investors — fund managers, retail investors, etc. — own 100% of the stocks.
• Some of them will own good stocks that go up, and others will own bad stocks that go down, but in aggregate they will own all of the stocks and get the market’s overall return.
• It is hard to pick the good stocks, or to pick a fund manager who will pick the good stocks.
• If you just buy all of the stocks, in proportion to their market value, you will get the market return, which is what everyone else gets on average, and you will pay lower fees.

And so index funds are a huge business and own something like 20%▸ AI summary of the stock of big US public companies (those in the S&P 500 index). There is some variation — index funds own more of some companies and less of others — but in a crude theoretical sense there shouldn’t be: If the idea of indexing is to buy all of the stocks in proportion to their market value, then the easy way to do that is to buy X% of every stock, for some constant X.^[1]

One quibble you might have with this theory is that investors do not exactly own 100% of the stocks, or at least, “normal” public investors like fund managers and retail investors don’t own 100% of the stocks. There are plenty of public companies whose founders (or their families, or private equity firms, etc.) own 10% or 20% or 50% or 90% of their stock, with only 90% or 80% or 50% or 10% of the stock in “free float” that anyone can buy. This creates two problems for indexing:

1. The theoretical problem is that, if index funds are trying to achieve approximately “the average return that active public investors can get,” these founder-owned companies mess up the math: If your index fund buys 1% of every company, including founder-controlled companies with low free floats, then you are overweight those low-float stocks compared to the average active public investor.^[2]
2. The practical problem is that, if there’s a company with only a 10% free float, and index funds own 20% of every company, they won’t be able to buy enough stock. There’s no more stock to buy; the founder owns 90% of it and she’s not selling.

How do you address these problems? One approach — historically quite a valid one — was not to worry about them. The first problem is pretty abstract, and when index ownership was small, there was no real reason to worry about the second problem. If index funds are 0.1% of the market, then even a 10% free float is no problem.

A second approach, more common now, is to weight indexes based on free float rather than market value.^[3] If there’s a $500 billion company whose founder owns 80% of it, then only $100 billion (20%) of the stock is free float, and the company will only get $100 billion of weight in the index. Index funds that buy 20% of every company will buy 20% of its float ($20 billion), and their exposure to the company will track other public investors’ exposure. 

Anyway! SpaceX is planning to go public pretty soon. When it goes public, it will be (1) gigantic and (2) everywhere: It might be the biggest initial public offering ever, it’s Elon Musk, it’s space rockets, it’s artificial intelligence, it’s data centers in space, it’s even Twitter a little. Everyone will pay attention to it and have an opinion about it. These are all, I would argue, reasons for it to be in stock indexes. If the point of a stock index is to include all of the stocks, then SpaceX should be in the index, because it will be extremely a stock. It will be more of a stock than any other stock. If you walk up to a random stranger and ask “hey so what about stocks,” she will likely reply “I know, SpaceX, right?” If your goal is to own the stocks that everyone else owns, you’d better own SpaceX.

But it will have a low float. Elon Musk will own a chunk of it, and various other early investors will continue to own a lot of shares, and a lot of those shares will be subject to lockup agreements that prevent holders from selling immediately after the IPO. If SpaceX does a $75 billion IPO at a $1.75 trillion valuation, then its initial free float will only be about 4.3% of shares outstanding.^[4]

Traditionally, when a company goes public, it is not immediately added to some of the big indexes like the S&P 500 or the Nasdaq 100. Those indexes tend to add companies that have been public for a while, that have “seasoned,” that have established themselves in the market and attracted a lot of normal institutional ownership. This tends to have the side benefit that, by the time a company joins the index, its IPO lockup might have expired so more shares are available in the free float.

But SpaceX is SpaceX so everyone is scrambling to change that. The Information reports▸ AI summary:

Nasdaq will change a rule for its flagship stock index to allow newly public companies to gain entry much more quickly, in a move that would help SpaceX and other companies expected to have gigantic initial public offerings this year.

In a rule change outlined Monday and effective May 1, Nasdaq-listed companies will be able to join the index after 15 days of trading, down from three months currently. Nasdaq said that industry professionals it had surveyed were “mostly supportive” of the proposal, but that some had raised concerns about whether the change would reduce price discovery for IPOs or “direct passive investment flows to unproven or overvalued securities.” In addition to the fast entry change, Nasdaq will remove a rule requiring 10% of companies’ shares to be publicly floated.

Here is Nasdaq’s summary of its rules consultation. The Nasdaq 100 is not a float-weighted index. Instead, it selects the 100 biggest Nasdaq-listed stocks (approximately) and weights them by market capitalization, with the restriction that each stock in the index must have at least 10% free float. It’s a pure binary cut-off: Companies with less than 10% free float get weighted at 0% of market cap; companies with more than 10% free float get weighted at 100% of market cap. That is arbitrary but mostly good enough, historically, but it won’t fly for SpaceX. Instead, the new rule will be:

• There’s no minimum free float.
• Companies with more than 33% free float will get weighted at 100% of market capitalization.^[5]
• Companies with less than 33% free float will get weighted at three times their free float, capped at 100%. So a company with a 10% free float will get weighted at 30% of market cap.

The result is that companies with more than 10% but less than 33% free float will get lower weightings under the new regime: A 15% float will get you a 45% weighting in the new rules, rather than 100% in the old rules. Companies with less than 10% float will get higher weightings: A 5% float will get you a 15% weighting in the new rules, rather than 0% in the old rules.

Does this make sense? I mean, no, but neither does the old rule of not float-weighting stocks at all, so who cares. Nasdaq says:

The low float security weight adjustment proposal also elicited comments that suggested a degree of misunderstanding and confusion regarding the intent of the proposal. Some responses expressed concern that index demand could exceed the available float, along with a suggestion that rejecting the proposal would “maintain a link between index weight and tradeable liquidity.” For low-float securities, no such link currently exists in the index, and the proposal is intended to establish one.

Some respondents, in their analysis of the impact, appeared to assume that the index is currently free-float-weighted; however, this does not reflect the current methodology. 

Right, this makes more sense than the current system, though it remains a compromise. (Here is a Substack post titled “Nasdaq’s shame” from a few weeks ago that got a lot of attention and is very critical of the float adjustment.) It is perhaps helpful that there’s not that much money indexed to the Nasdaq 100. Bloomberg tells me that the market capitalization of the Nasdaq 100 index is about $30.5 trillion and the total assets of ETFs indexed to it are about $500 billion (1.6%). The index funds aren’t going to run out of shares to buy.

On the other hand, the active funds have a problem: If they want to track the index, they will have to buy a lot of SpaceX shares. The Information▸ AI summary:

Fund managers fret that if they sit out the SpaceX offering and the shares soar, their performance will look dismal. If they buy in and the shares fall, they’ll have safety in numbers because they’ll look like everyone else. That’s particularly true for long-only institutional investors who manage money against benchmarks, said Karen Snow, former head of listings at Nasdaq, who now runs Rose & Co. Capital, a capital markets advisory firm.

“At the end of the day, institutional investors are rational. They get paid to be rational. Do they have to participate? Yes,” said Snow. “If you don’t participate, the risk is way higher.”

Musk and his bankers are well aware of the buying pressure they’re putting on fund managers. They’ve got something like $75 billion worth of stock to sell. And if Musk’s army of small investor followers know big buyers are waiting to pounce, they’re likely to bid up SpaceX’s share price in the first days of trading.

Yeah, man, I don’t know, that’s what you get paid for? Like, your job is to buy the stocks that go up? Not the stocks that are in the index? Buying the stocks that are in the index is the job of index funds. The active fund managers are supposed to make decisions; the index funds are supposed to get returns that reflect the average of the active funds’ decisions. With a lot of stocks, the decisions don’t matter that much, and most active funds will be pretty average. With SpaceX — huge, new, Elon-y, low-float, volatile — the decisions might matter a lot: There will be more dispersion, and funds that buy a lot of SpaceX might perform much better or much worse than funds that don’t. If your goal as a fund manager is to beat the index, you have to choose right. If your goal is to be average, though, it’s pretty easy.

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