Money Stuff: Shorts Will Sell You SpaceX

Right now, about 5% of SpaceX’s stock is available to trade, just the 639 million shares that it sold in its initial public offering last month. By the middle of next month, about 12% of SpaceX’s stock (about 1.58 billion shares) will be available to trade, as some pre-IPO SpaceX shareholders are partially released from lockup agreements that currently prevent them from selling. [1] If you want to buy SpaceX stock now, it is fairly scarce; if you want to buy SpaceX stock in a month, it will be much less scarce. [2]

This is an annoying situation. Perhaps you want to buy SpaceX stock now, because you are thinking about it and it’s in the news and stuff. “Love those rockets and data centers,” you think. You don’t necessarily have a strong view on price: Whatever the market thinks SpaceX is worth, you’ll pay; you’re just happy to be along for the ride. But this thing about temporary scarcity is annoying. Why would you compete to buy the few shares that are available now, when so many more shares will be available in a month? The market price, you might worry, reflects lots of demand but not the supply that is predictably and quickly coming.

Someone should intermediate the trade for you. Like, this would be a useful service for someone to provide to the market:

1. Buy shares from the people who will sell them in a month when the lockup expires, and then
2. Sell them to you, now.

You don’t want to buy the scarce shares that are available now; you want to buy the plentiful shares that will be available soon. But you want to buy them now. You know they are coming. Someone should do a small bit of predictable time travel to go fetch those shares from the plentiful future and deliver them to you here in the scarce present.

We talked about this yesterday, and I drew a parallel to the index rebalancing trades that happened last week. Three weeks ago, 0% of SpaceX’s public float (the 639 million publicly traded shares) was owned by Nasdaq 100 index funds, because SpaceX was not in the Nasdaq 100. But everyone knew that, at 4 p.m. last Monday, July 6, it would be in the Nasdaq 100, and Nasdaq 100-indexed investors would have to buy something like 10% of the float right at that moment. [3]  Annoying situation! Maybe you wanted to sell some stock on June 29, but you knew there would be a ton of demand July 6. Someone should intermediate the trade between you and the index funds: Somebody should do a small bit of very predictable time travel to buy the shares from you on June 29, sell them to the index funds on July 6, and pay you a price (on June 29) that reflects that index-fund demand (on July 6). Somebody does. That trade is called “the index rebalance trade,” big hedge funds do it, and they make a lot of money doing it, though it is risky. It is a service that they provide to the market, a form of liquidity provision, an intermediation of trades in time: They let you sell into index-fund demand without waiting for the index funds to actually buy.

The trade I’m proposing is the same, but in reverse: Let you buy from the lockup-release supply, without waiting for the lockups to actually release. The mechanics are exactly the same, except that instead of buying from you, holding the shares, waiting a while and then selling to index funds, a hedge fund would have to sell to you first, hold negative shares, wait a while and then buy from the lockup-release supply.

Obviously hedge funds do that! And they make a lot of money doing it, though it is risky. Bloomberg’s Bailey Lipschultz reports:

SpaceX bears are minting billions on paper as the company’s stock price cracks ahead of a closely-watched rocket launch and upcoming earnings that will unlock a flood of shares.

Short-selling investors have seen paper profits jump to $3.88 billion, data compiled by S3 Partners show, as shares of Elon Musk’s rocket, satellite, and artificial intelligence company sit near the $135 per share level it priced its initial public offering at. The stock was headed for a fourth day of losses after slumping as low as $132.15.

The returns for skeptics came as bearish investors added to their bets with roughly 181 million shares, or 28% of the available stock for trading, sold short, the data show. That’s one of the highest levels for a newly-public company in its first month, according to S3’s Ihor Dusaniwsky.

Short selling is that trade. Hedge funds sell stock to you now when it’s scarce, and then buy it back in a few weeks when it’s plentiful. You get to buy from the lockup-release supply now, without waiting for the lockups to release.

Look. Obviously most people who are short SpaceX do not think to themselves “I am providing liquidity, intermediating in time between people who want to buy now and pre-IPO shareholders who want to sell in a few weeks when the lockups are partially released.” Probably most of them have not marked their calendars for the lockup release, planning to cover their shorts exactly that day; probably a lot of them are hoping that earnings will be bad or the rockets won’t work or there will be other negative news or people will just get sick of Elon Musk or whatever. I am being somewhat silly, describing shorting SpaceX as a liquidity-provision trade. It’s mostly a valuation trade. 

Some of them absolutely have marked their calendars for the lockup release, though. More to the point, “roughly 181 million shares, or 28% of the available stock for trading, sold short” means that the short sellers have gone some way toward solving the scarcity problem. Like:

• Right now, SpaceX has provided 639 million shares to trade. People want more.
• In a month, there will be 1,583 million shares to trade.
• But right now, there are actually 820 million shares to trade: the 639 million provided by SpaceX, plus another 181 million provided by short sellers. [4]

SpaceX stock is not as scarce as it looks, because the short sellers have helpfully provided more. 

Everyone knows that leverage magnifies gains on the way up and losses on the way down. If you buy stock on margin — put up $100 of your own money, borrow $100 and buy $200 of stock — then you get more stock for your money. (Those numbers are traditional: US retail investors can generally borrow 50% of the price of the stock they buy.) If the stock goes up 10% (to $220), you make 20%; your gains are magnified. If the stock goes down 10% (to $180), you lose 20%; your losses are also magnified. These effects can self-reinforcing: If the stock goes up, you have more equity in your account and can borrow more to buy more stock, which pushes the price up more; if the stock goes down, you have less equity in your account and might have to sell some stock, which pushes the price down more. 

Again, everyone knows this, and margin leverage is often blamed for booms and busts. (The US rules limiting margin leverage were introduced in reaction to the crash of 1929.) “People Are Worried About Stock Market Leverage,” I wrote last month.

This is, in general, a somewhat inefficient process. If you buy $200 of stock on margin, and it goes up to $220, you now have $120 of equity in your account and can borrow $20 more to buy more stock. [5]  Do you? Maybe, if you think of it. (Bill Hwang did.) But you might not do it every day. You can have the thought “ah, sweet, my stock went up” without having the additional thought “better buy more.” Similarly, if the stock goes to $180, you now have only $80 of equity in your account, 44% of the value of the stock. Does your broker force you to sell $20 of your stock, to get your equity back up to 50%? Generally no: The maintenance margin requirement is generally lower than the initial requirement, so your stock can decline a fair amount without triggering a margin call. 

And so margin leverage amplifies gains and losses, but not as much or as quickly as it could. When stocks go up, more margin leverage is available to buy more stocks and push them up more, but people do not always immediately take advantage of all of that. When stocks go down, some people might have to sell stock to meet margin calls, but not all of them. The effects of leverage are lumpy and delayed; there is friction in the feedback loop. The friction is caused by, like, normal human behavior and customer service. Most retail investors are not constantly adjusting their stock positions every time the price moves, and it would be annoying if their brokers made them do that.

At least, that’s how traditional retail margin leverage works. You could create a purified product that automates all of this: You borrow money to buy a stock; every time the stock goes up, you borrow more money to buy more stock; every time it goes down, you sell some stock to pay back some of the loan.

Would you want this product? Ehhhhh. Empirically, people do. It’s called a single-stock leveraged exchange-traded fund: It’s a fund that borrows money to buy stocks and adjusts its borrowing each day, borrowing to buy more whenever the stock goes up and selling to repay loans whenever the stock goes down. [6]  These are popular. But when I put it like that, you kind of see the problem, right? This is a maximally efficient frictionless way for leverage to magnify gains on the way up and losses on the way down. Is that the kind of efficiency you want?

Anyway!

South Korea will temporarily halt new listings of single-stock leveraged exchange traded products to curb market volatility after a surge in popularity of funds tied to Samsung Electronics Co. and SK Hynix Inc.

The ban will remain in place until market conditions stabilize, the Financial Services Commission said in a statement Thursday. Authorities will also raise the minimum deposit requirement — or minimum account balance in cash required — for leveraged ETF trading to 30 million won ($20,300) from 10 million won, expected to be implemented Aug. 5.

The measures mark Seoul’s most comprehensive effort yet to cool a retail trading frenzy that’s transformed the $4.1 trillion equity market into the world’s hottest and also one of the most turbulent. Announced after a meeting of regulators, finance ministry officials and central bankers, the rules follow growing worry that leveraged ETFs tied to Samsung and SK Hynix are causing excessive market swings. …

The products, along with the two chipmakers they track, have become so popular they now account for more than 70% of trading value after attracting a flood of retail money. Foreign investors, however, have grown increasingly cautious, selling more than $100 billion worth in local shares this year alone.

If you just automatically double the leverage on, like, the entire stock market, then it will be twice as volatile. Which is good, for you, if you own stocks and they’re going up. But sometimes they go down.

The main thing that big multistrategy multimanager hedge funds do is hire portfolio managers and pay them $50 million a year to come up with investing ideas. This is a lucrative business — those hedge funds are profitable — but it is also obviously expensive. 

Another thing that big multistrategy multimanager hedge funds increasingly do is find portfolio managers, not hire them, but pay them $10,000 a year to come up with investing ideas. This is called “buyside alpha capture.” You might reasonably assume that the investing ideas that you get for $10,000 a year are worse than the ideas that you get for $50 million a year. But they are a lot cheaper, and perhaps you can buy them in bulk. Bloomberg’s Liza Tetley and Nishant Kumar have a story on buyside alpha capture:

Now the multistrategy giants are homing in on one of the few resources they have yet to fully exploit: outside intelligence. That increasingly means paying for “buyside alpha” signals, seeking out raw trading ideas from small managers who are too niche or too independent to be hired.

“A decade ago they just wanted to hire the talent,” said Marcus Storr, head of alternative investments at the German asset manager FERI. “Today they are also happy to rent it.” …

Some 14% of hedge fund managers running less than $500 million already share, or have shared, trading ideas, a JPMorgan Chase & Co. survey found. Half are open to considering it, according to the poll of 127 managers, which was published in January. …

In return for their ideas, contributors can earn anything from $10,000 to more than $750,000 a year, JPMorgan says. Payouts can combine a fixed participation fee and a variable one, typically based on performance against an agreed benchmark.

We have talked about alpha capture several times recently. One thing to think here is that a big hedge fund can use a small hedge fund’s ideas better than the small fund can. If a small hedge fund manager has an idea, she can put some of her small fund’s money into it and hope it works. The big hedge fund has more options:

1. If the idea is really good, the big fund can put a lot more money into it than the small fund could. The big fund has more money than the small fund.
2. If the idea is so-so on its own, it might nonetheless improve the risk-adjusted performance of the big fund’s overall portfolio. Adding a so-so uncorrelated idea to a big portfolio is better than putting all of your money into the one so-so idea. The big fund has more ideas than the small fund.
3. If the idea is terrible, that’s useful too: The big fund can short it. (The small fund could short it too, but people often don’t realize that their own ideas are terrible.)
4. The big fund might have more nuanced quantitative models to help it figure out how to use the idea. Maybe the idea works Monday through Thursday but not on Friday. I wrote once about Marshall Wace’s (sell-side) alpha capture program: “I like to imagine that there is some stock salesperson out there who would be an excellent hedge fund manager between the hours of 10 a.m. and noon, but after lunch she gets terrible ideas so her overall track record is mediocre. She lacks the rigorous self-awareness to see this, but Marshall Wace knows her better than she knows herself, so it makes a fortune trading on her pre-lunch ideas while she toils in obscurity on the sell side.”

These are the essential elements of a multistrategy fund generally — having a lot of money, running a lot of uncorrelated strategies, maximizing overall risk-adjusted returns, coaching and supervising portfolio managers to improve their performance — and you can apply them to outside managers too. 

What’s in it for the small fund’s manager? Well, “$10,000 to more than $750,000 a year,” which is something. But also, in theory, if you are sharing your investment ideas with a big fund, maybe the big fund should share some of its advantages with you? It’s not going to give you any of its investing ideas; don’t be silly. But it could give you more capital to invest in your ideas:

The promise of capital can be another lure, since multistrategy firms can use programs to audition external managers. Cash from these firms, often via separately managed accounts, has become one of the most common ways to launch or scale up a hedge fund.

And, if the big fund is using its own sophisticated models to refine the implementation of your idea, maybe it could share some of that refinement with you:

Proponents extol potential coaching benefits. In some programs, newer managers can get helpful feedback, said Stemerman of CenterBook, where he serves as chief executive and chief investment officer. For example, managers could be advised if they tend to trade positions too quickly, he said.

“You’re really good before noon but maybe stop trading after lunch” might be helpful feedback for some small managers, and the pod shops are in a good position to provide it.

Bloomberg’s Madison Muller reports:

Kalshi Inc. is expanding in biotechnology by offering wagers on the outcomes of clinical trials and regulatory decisions, giving traders a more direct way to bet on key industry catalysts.

The prediction market platform says the move will allow investors to isolate binary events like drug approvals from a company’s overall stock performance. Kalshi launched 13 new biotech contracts last night in partnership with AI-powered intelligence firm AppliedXL, including bets on whether US regulators will approve medicines made by companies like Sanofi and Gilead Sciences Inc.

Here is Kalshi’s announcement. Like:

1. It is useful, for the world, to know whether some drug will work. “Will the Mets win tonight?” is not an especially socially useful question for Kalshi to answer, but “will this drug cure cancer?” seems like a good question to ask the truth machine. (“Michael Selig, the chair of the Commodity Futures Trading Commission that regulates prediction markets, has also touted drug-trial contracts as a potential way for sick people in need of medicine to hedge their future treatment costs,” is an extraordinarily dark sentence in that Bloomberg story, but I bet there are some good uses too.) 
2. The question is arguably answerable with sophisticated analysis of public data. You could, like, use your domain knowledge of biotechnology and build an artificial intelligence system that models the compounds drug companies are testing and tries to figure out if they’ll work. Some amount of science can be done — by hedge funds, by hobbyists — to make these predictions informative. 
3. Would that work be done, if there was not a prediction market for betting on drug trials? If the answer is socially useful, you might imagine that there are already some incentives to figure it out. Most notably, there’s the stock market: If you figure out that a drug will work, you can buy the drug maker’s stock and make money if you’re right. But Kalshi says: “Public equities force a position on the whole business at once — on management, cash, pipeline, and macro together. An investor can be right about the science or the regulatory outcome and still watch the stock move the other way.” I suppose having a cleaner way to bet on drug results would create more incentives to figure them out.

On the other hand, if the goal here is to build a truth machine for drug trials, isn’t there someone else you should be asking? Muller notes:

The company says it spent months consulting physicians, pharmaceutical researchers, bioethicists and other experts before launching its biotech initiative. They included former Eli Lilly & Co. scientist Alpheus Bingham, who helped build an internal prediction market in the early 2000s to forecast the success of various drugs and research projects. The goal wasn’t gambling but rather to aggregate dispersed knowledge from across the company into a single probability estimate.

Right, yes, “get the people working on a drug trial to bet on its outcome” seems like it would produce good information about the outcome. Kalshi, of course, specifically excludes those people: “The prohibition on trading by anyone who holds material nonpublic information applies here exactly as it does in every other Kalshi market,” it says. The weird thing about prediction markets is that, culturally and intellectually, they grew out of markets like that Lilly one, where insider trading was encouraged to make prices more accurate. But now they are regulated US commodities exchanges, where insider trading is prohibited. 

Speaking of which: 

President Donald Trump’s longtime teleprompter operator is under investigation by federal regulators in connection with bets they allegedly made on the prediction market platform Kalshi related to statements made by Trump.

The operator allegedly made more than $90,000 in profits on the trades, but most of that money was frozen by Kalshi after the bets on the platform’s “Mentions” market were flagged as suspicious, according to the company. That market includes contracts on words or phrases that Trump will say during a scheduled speech.

Okay sure whatever.

You can go on X and see what people are talking (or rather, posting) about. You can just read some posts randomly and get a sense of the vibe, or you can curate people to follow and see what they are interested in, or the right side of the website has a bunch of “Today’s News” and “What’s happening” widgets to get you up to speed. If you spent a lot of time doing this, you would have a sense of … something. You would have a sense of what people in a certain part of online are interested in, what they think about the news. You might be able to extract investment ideas from this. If people on X are saying nice things about SpaceX (X’s owner), maybe buy SpaceX stock. If they’re worried about the Strait of Hormuz, maybe buy oil. I don't know, this is not investing advice, but many asset prices reflect market sentiment, and online posts are an unusually direct way to access sentiment. People will just tell you how they feel. It’s a biased sample of people, but they have a lot to say.

This is all quite well-known, and lots of investment firms do social-media sentiment analysis as an input in their investing process. Just poking around on X is inefficient, though; it is more useful to have a computer collect and analyze millions of posts than to read a few of them yourself. And so X offers an application programming interface which, for a price, lets you connect your computer to X and analyze what people are posting.

Truth Social, the social media feed operated by Trump Media & Technology Corp., is a smaller and more self-selected source of sentiment than X or Reddit or whatever. Still, you could imagine using it to augment your sentiment analysis. If there are, you know, dozens of Truth Social posts saying nice things about a company, maybe that is a buy signal; maybe you should connect your computer to Truth Social and have it analyze, like, thousands of posts to extract more sentiment data. 

Of course I’m kidding, come on. Investors absolutely do use Truth Social for sentiment analysis, but mostly to analyze one person’s sentiments. Truth Social is where Donald Trump goes to post stuff, and the stuff he posts is regularly market-moving, so it is useful for many investors to have Truth Social open to see what he’s getting up to. Having a computer scrape thousands of Truth Social posts to see what other people think is less useful; those people can’t bomb Iran.

But having a computer scrape only Donald Trump’s Truth Social posts, so that it can react to them a second faster than you would if you were reading them yourself, could easily be useful. Obviously the right business model for Truth Social is to sell hedge funds access to Donald Trump’s market-moving decisions a second or two before they become public. Really the only impediments to that business model are, you know, shame, and legality, but … ??????

Anyway Axios reports:

Trump Media & Technology Group is launching a backend interface that will allow financial services companies to access real-time Truth Social data for a fee, interim CEO Kevin McGurn tells Axios. …

The new Truth API provides real-time access to posts from the platform’s top 10 trending accounts. In the future, the API can be expanded to more accounts for customers willing to pay more, McGurn says.

Those accounts include decision makers who impact policy and geopolitical outcomes, such as President Trump (@realDonaldTrump), the White House (@WhiteHouse), FBI Director Kash Patel (@Kash), White House deputy chief of staff Dan Scavino (@DanScavino) and Health and Human Services Secretary Robert F. Kennedy Jr. (@seckennedy).

Trump Media has already signed several customers ahead of the Aug. 1 launch, including financial news organizations and high-frequency trading firms, McGurn tells Axios. He did not identify specific customers.

Ten accounts! “The API can be expanded to more accounts for customers willing to pay more,” okay, but really they should charge more to access fewer accounts.

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