Money Stuff: Opting Out of the AI Boom

I mean, not literally. Keep Nvidia and Alphabet and the flavoring company and the toilet company; every company is an AI company now. But:

1. In the next few months, SpaceX, Anthropic and OpenAI will all probably go public at massive valuations.
2. They will be fast-tracked into the major stock indexes, because those indexes are designed to reflect the stock market, and reflecting the stock market, in 2027, will absolutely require big allocations to those three companies.
3. A lot of people are happy about this, because they like AI, Elon Musk, rockets, etc., and are excited to finally be able to own SpaceX/Anthropic/OpenAI in their index funds.
4. A lot of people, however, are unhappy about this, because they do not like AI, Elon Musk, etc., and/or because they are morally offended that the big indexes are adjusting their rules to fast-track these companies, and/or because they think that the whole process is about pumping up an AI bubble and then dumping it on index investors.
5. If you’re in the happy camp, life is easy: Your index funds will buy these stocks in fairly short order (not that short, in the case of the S&P 500), and you will own them.
6. If you’re in the sad camp, there is very little you can do about it. Your retirement money is probably in index funds. You will have to write a sternly disappointed letter to, like, Vanguard, saying “I have been a loyal user of index funds for 20 years but I cannot abide SpaceX, please send me my money back.” And then invest it in stocks you pick that are not SpaceX. (Not investing advice!)

This is a market failure, all those stern letters are inefficient, and someone — Vanguard and BlackRock — should offer, like, the Total Market But Not SpaceX or OpenAI or Anthropic Fund, or the S&P 500 But None of Those Guys Fund, or maybe even the S&P 500 But Under the Old Rules Where You Had to Be Profitable and Wait 12 Months to Get Into the Index Fund. I realize that there are copyright issues here but, you know. Honestly S&P should offer those indexes. Not that long ago, environmental, social and governance (ESG) investing was a big thing, and big fund companies offered regular and ESG-flavored versions of their index funds. The ESG version is, like, “the S&P but without the bad companies,” based on some set of ESG exclusion rules. The exclusion rule here is very easy! “No SpaceX, no Anthropic, no OpenAI.”

I am not saying that the no-AI fund will outperform the regular index funds over the next three months or three years or three decades, or that it will attract anywhere near as much money as the regular index funds, or that fund companies should offer the no-AI fund instead of the regular index fund. I’m just saying that people — on the internet, in my inbox — are loudly calling for it, and setting up an ETF is cheap, so why not do it. It would sell like hotcakes, I said on the Money Stuff podcast last week. It has the most important attribute of a successful ETF, which is a goofy story you can talk about on television.

Anyway my old colleague Bess Levin writes at New York Magazine:

Being force-fed shares of SpaceX, Anthropic, and OpenAI may be a bitter pill to swallow for the many Americans who are not at all excited about artificial intelligence. In April, a Gallup poll showed just 18 percent of people ages 14 to 29 feel hopeful about AI, down from 27 percent in 2025. The same month, an Economist/YouGov survey showed more than 70 percent of Americans believe AI is developing too quickly with 79 percent of people 65 and older agreeing. 

Maybe that’s wrong and nobody actually cares what is in their index funds, but it seems like an experiment worth running.

Theory would tell you that the expected financial return from owning a sports team is low. Owning a sports team is cool and a lot of people want to do it, so they will pay more for sports teams than would be justified by the teams’ expected cash flows\. Things that everyone want trade at a high price, which means that they trade at a low expected return. [1]  The cost of capital of a sports team is low.

In fact, sports teams trade at such high prices that they are increasingly syndicated: Instead of one rich guy buying a sports team, teams now might be owned by multiple special-purpose vehicles, funds, etc. One might wonder, like, what is going on there. Owning a sports team is very cool — you get to hang out with the players and tell them what to do, etc. — but is owning 1% of an SPV that owns 13% of a sports team proportionally cool? One possible answer is that the joy and cachet of telling everyone that you own a sports team is fully divisible into fractional shares, so in fact syndicated equity financing of sports teams makes sense even at high luxury prices and low expected financial returns. Another possibility is that everyone is somewhat confused.

Similarly, there are businesses that sell fractional ownership of art. If you own 100% of a painting, then (1) maybe you can resell it at a profit one day and (2) you can hang it over your couch now. The price you pay for it should reflect both benefits. If you own 0.1% of a painting, then (1) maybe the person managing the investment for you will resell it at a profit one day and give you 0.1% of the proceeds but (2) no couch. It seems strictly worse. And yet the business exists, implying that the cheapest funding for art might be not one rich person with a wall to fill but a bunch of investors with purely financial motivatios.

Or we have talked a lot, including last month, about businesses that purchase home equity from homeowners. If you own a house, you generally have (1) a levered exposure to home price appreciation plus (2) somewhere to live. An investor who buys a portion of your home equity gets the levered exposure to home prices, but doesn’t generally move in with you. It is pretty clear that the investors in these products are not confused: Those products are structured in a quite investor-favorable way, and sometimes the homeowners complain. (The homeowners are confused.) But the products have to be structured in an investor-favorable way, because — as theory would tell you — the expected financial returns from home price appreciation are low, because people do not buy houses principally to get price appreciation. (They buy them to get a place to live.) Simply selling 20% of your home equity to a rational economic investor, at the price you paid, wouldn’t work. You need to give the investor something extra, to make up for the fact that you’re not giving her a place to live. 

Still I suppose you could have a general model like this:

1. There is some stuff that is cool to own.
2. Theory would tell you that the expected returns from owning that stuff are low, because it is cool. People own it for reasons other than expected economic returns.
3. That said, you never know: As the world gets richer, etc., maybe more people will have the means and desire to own sports teams or Picassos or fancy watches or grand cru Burgundy, and the realized returns from owning the cool stuff will be high. You will be able to sell it to new rich people for much more than you paid for it.
4. Also you you can sell fractional ownership of cool stuff to investors.
5. You can do this in part by telling a financial story: “More people will have the means and desire to own this cool stuff, so we’ll sell it at a big profit.”
6. But you can do it in part by a somewhat hazy association with the coolness: “This Picasso is pretty, so buy a 1% stake in it and then contemplate its prettiness on your computer screen while it is locked in a dark climate-controlled vault.” “This soccer team is good, so fist-bump your friends when they win as you watch the game from a bar because your 0.1% ownership doesn’t get you seats in the owners’ box.” Or whatever.

One question that I had, reading this story from Bloomberg’s Nishant Kumar, was: Does that work for lending?

Fasanara Capital is starting a platform to finance vintage, racing and classic cars made by luxury brand Ferrari. The venture which includes Mattioli Automotive Group and Enzo Mattioli Ferrari, a member of the eponymous family, will also selectively buy, restore and resell rare vehicles. The manufacturer is not involved in the venture.

The lending vehicle has been seeded with about $75 million in initial capital and the London-based hedge fund expects to raise about $500 million over two years for the strategy, Fasanara Capital Chief Executive Officer Francesco Filia said in an interview.

The initiative is part of a push by private credit lenders into some of the most exotic corners of alternative finance. Once largely focused on real estate and corporate loans, increasing competition is leading the debt providers to diversify into assets backed by everything from fine wine to music royalties and football players’ transfer fees.

Like, is the cost of capital for lending against Ferraris low, because the people investing in the fund are like “ooh cool I get to lend against Ferraris”? When they drive their minivans to the train station, do they daydream about the loans defaulting and seizing the collateral? You had better believe that the article about this proposed asset-backed lending fund is illustrated with photos of nice red Ferraris. In general, you might expect giant diversified lenders (like banks) to have a lower cost of capital than specialized exotic lenders that take a lot of idiosyncratic risk. But maybe that’s not true if the idiosyncratic risk is very cool.

The big multi-manager multistrategy hedge funds are essentially in the business of evaluating, hiring, motivating, supervising and firing portfolio managers. There are people in the world (portfolio managers) who can do some trades (picking tech stocks, index arbitrage, Treasury/futures basis, whatever), and they are inputs to the process. The process is acquiring the right mix of those people in the right quantities. The hedge fund has a series of quantitative and qualitative mechanisms that ultimately produce something like “a $1 billion bet on Alice and a $2 billion bet on Bob and a $3 billion bet on Claire and Dave is fired.” 

Any quantitative hedge fund manager knows that your edge is proportional to (1) your skill and (2) the number of independent decisions you make with that skill. If your alpha comes from being very good at evaluating portfolio managers, you should try to find more portfolio managers to evaluate. The obvious way to do this is to scale up your hedge fund — instead of having five portfolio managers, hire 100 — but that is expensive. There are other ways. Bloomberg’s Liza Tetley and Nishant Kumar report:

Ken Griffin’s Citadel is preparing to launch a new program that will collect trading insights from other hedge funds in exchange for a fee to feed into its own quantitative strategies, as the industry’s largest firms jostle for market data and more ways to deploy capital.

The new buyside alpha-capture program will sit within Citadel’s Global Quantitative Strategies business, people familiar with the matter said, asking not to be identified discussing private information. The initiative will collect trading signals from external discretionary managers with a track record, one of the people added.

We talked last year about Marshall Wace’s alpha capture program, which is more sell-side-focused but has a similar basic insight: If you have built excellent general-purpose tools to evaluate people’s trading ideas and ability, you can make more money on their ideas than they can. They only know what they think and how confident they are, but you know how confident they should be.

The dollar price per share of a company’s initial public offering is somewhat arbitrary: While it is still private, the company can split or combine its shares however it wants to get a price per share that is most appealing to public investors. You don’t want to go public at $5,000 per share, or $5, and you’d never have to. A 2-for-1 pre-IPO stock split would get SpaceX so close to $69:

SpaceX is planning to offer shares at $135 apiece to raise $75 billion in its ⁠initial public offering, according to people familiar with the matter, as Elon Musk rejects another Wall Street convention by setting a fixed price ahead of the marketing phase of the deal. ...

The move adds to the unconventional aspects of a deal that’s set to be the biggest ever listing. Most companies listing in the US typically announce a price range before marketing shares during investor presentations, with only a handful of tiny firms opting for a fixed price. Such offerings are more common in Europe and Asia. For example, the Hut Group raised $2.5 billion in a London IPO in 2020.

I don’t get it? Ordinarily you’d launch at, like, “$130 to $140,” and then investors would put in orders for some quantity of shares (possibly zero) at each price, and you’d end up pricing the IPO based on where there was demand. If everyone was super-enthusiastic, you’d price at or above the top of the range; if the response was meh, you’d price at or below the bottom. If you go out at $135 and get $1.5 trillion of demand, where do you go?

Still I suppose:

1. You’re not getting $1.5 trillion of demand. This is the biggest IPO ever by quite a distance, and maybe that undercuts the usual gamesmanship of an IPO. An investor in a hot IPO who wants $100 million might put in an order for $500 million, expecting to be cut back. An investor in a $75 billion IPO who wants $1 billion might be more hesitant to put in an order for $5 billion, because that’s just too big. It’s possible that reducing the number of variables in this IPO will make it easier to get done.
2. As a corporate finance matter, knowing how many shares you’re going to issue and how much money you’re going to raise is a lot more convenient than having a wide range and finding out the answer on the night of pricing. If you’re immediately spending that $75 billion on flinging data centers into space, it helps to know that you’re getting exactly $75 billion.
3. The typical IPO process is a negotiation between investors and the company, mediated by the banks. Plausibly Elon Musk simply doesn’t want to haggle over price with a bunch of investors. Just tell them the price and wait; fear of missing out should do the rest.

On the one hand, GameStop Corp. Chief Executive Officer Ryan Cohen is running an activist campaign to make himself CEO of eBay Inc. GameStop keeps acquiring (options to buy) eBay stock — it’s up to 7.8% as of last week — and Cohen keeps retweeting mean comments about eBay’s existing management and then filing the retweets with the US Securities and Exchange Commission. Also GameStop announced earnings yesterday and they were good: Revenue is growing, expenses are shrinking, it’s the “highest quarterly net income in GameStop’s history,” and it all helps make the case that Cohen would do a good job running eBay too.

On the other hand, GameStop is technically still, sort of, vaguely, in the process oftrying to buy eBay, for “half cash, half stock,” though eBay has said no. Two quite evident problems with GameStop’s bid for eBay are (1) it doesn’t have enough cash and (2) somehow it doesn’t have enough stock. Is GameStop still pursuing this bid? Uh:

GameStop also said its board approved a $2 billion stock buyback authorization. The authorization is effective for three years and replaces a previous authorization from March 2019.

No, no, you want more stock and more cash. I feel like spending down cash to reduce the share count is the exact wrong move, if GameStop is actually trying to buy eBay? I guess they don’t technically have to do any of the repurchases, if somehow tomorrow eBay says “hey you’re right let’s do a deal.” But they are probably not holding their breath.

Meanwhile Bill Ackman is more decisive. He proposed a similar quasi-takeover of Universal Music Group NV in April, got rejected last week, and now is out:

Bill Ackman is looking to sell his stake in Universal Music Group NV just days after the Amsterdam-listed group rejected a takeover bid by the hedge fund billionaire.

Pershing Square will sell roughly 80.6 million shares in an overnight placing, according to a statement Wednesday. 

There are, what, six kinds of companies?

1. Artificial intelligence companies.
2. Companies that will benefit from AI.
3. Companies that will be disrupted by AI.
4. “HALO” companies that will be unaffected by AI.
5. Random cannabis/crypto/karaoke/sneaker companies that are hastily pivoting to AI to get a stock-price lift.
6. That one Japanese food-additive company, Ajinomoto Corp., which discovered umami and invented monosodium glutamate, which led to an expertise in chemistry that made it the leading maker of a certain sort of insulating polymer film that is essential to packaging advanced semiconductors and thus “one of the most critical materials technologies underpinning global AI infrastructure,” but which doesn’t like to make a big deal about it because it is focused on making food more flavorful and the AI stuff is just something that happened.

In a world full of Allbirdses, strive to be an Ajinomoto. (Though its shareholders might disagree, and we talked about an activist campaign to try to make Ajinomoto talk more about its AI business.) Anyway, toilets:

Japanese toilet maker Toto Ltd. expects spending in its chip-related operations to make up more than half its total capex in coming years, as it chases new gains from an artificial intelligence surge.

The maker of heated toilet seats and bidets is capitalizing on an unexpected surge in demand from chip gear makers seeking Toto’s expertise in ceramics designed to withstand dirt particles, corrosive materials and high temperatures. A global rush in AI spending is lifting sales of Toto’s electrostatic chucks, which hold silicon wafers in place during chip fabrication, and other materials used in chipmaking.

I want an exchange-traded fund of Accidental AI Companies. I don’t know if they perform better or worse than Regular AI Companies, or for that matter Fake AI Companies, but they are aesthetically pleasing.

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