Money Stuff: You Can Just Not Buy SpaceX

The simple model is that, if you don’t like SpaceX, you don’t have to buy it. For whatever reason. If you think that SpaceX is worth $1 trillion, or $780 billion, or zero, and it sells shares in its initial public offering at a $1.78 trillion valuation, you can just not buy any shares. (If the price later drops, you can revisit that decision.) Or if you think that SpaceX’s governance — in which Elon Musk has total control of the company and can’t be sued or second-guessed by shareholders — is oppressive for shareholders, then just don’t buy any shares. Nobody is forcing you to become an oppressed SpaceX shareholder. [1]

If you want to go around telling people that SpaceX is bad and that they shouldn’t buy it either, that’s your prerogative. But your main defense against SpaceX’s governance and valuation is not to buy the stock.

I feel like there is another model? I am not sure that anyone quite puts it in words, but I think it goes something like this:

1. Public companies are owned by public shareholders.
2. Big institutional public shareholders — and particularly widely diversified indexed or quasi-indexed public shareholders — have a sort of stewardship responsibility for public companies. A private company “belongs” to its founders, but in some meaningful sense a public company “belongs” to BlackRock and Vanguard and the big public pension funds. They are the large universal repeat players; they take responsibility for the companies as a whole.
3. Those big public shareholders, in their role as stewards of public companies, have a grim obligation to own some shares of every company and tell the companies what to do. If they have to sue those companies for securities fraud or fiduciary violations or overpaying their chief executive officers, well, they won’t enjoy it, but that’s what they will do.
4. SpaceX’s governance breaks this social compact: The big public pensions can buy shares of SpaceX in or after its IPO, but they won’t be able to supervise SpaceX. If they ask for a meeting with Elon Musk to express their concerns as shareholders, he will text them back a poop emoji. If they run a proxy fight to install new directors, he will use his super-voting shares to stop them. If they try to sue him for conflicts of interest or getting paid too much, SpaceX’s corporate charter will effectively stop them. They have no tools to exercise their stewardship responsibility over SpaceX.
5. That’s not allowed!

This model is not correct, but you can sort of understand why people — at least at the big asset managers and pension funds — might believe it. For one thing, they are used to it; they really do have levers to supervise (and sue) most public companies. (And there at least used to be some regulatory and political support for the idea that public companies had to be answerable to their shareholders; SpaceX’s approach to stopping shareholder lawsuits was blocked by the US Securities and Exchange Commission until last year.) For another thing, they are smart and well-intentioned and think that their supervision adds value. If you have spent a long time giving public companies your input, you will believe that your input is good, and will be offended if a giant salient public company responds to your input with a poop emoji.

Again, nobody says these things exactly, but you can infer that they believe them from stories like this:

New York City Comptroller Mark Levine says the unprecedented control that Elon Musk will have over SpaceX represents a new level of disregard for regular shareholders’ rights.

“I understand that we are in an era of founders wanting more control,” Levine said in an interview. But what Musk is planning with SpaceX “is way beyond what we’ve seen.”

“There’s no precedent for this,” he said. …

Levine, whose job entails overseeing about $300 billion in both actively and passively managed portfolios in New York city’s public pension funds, says it would be “very complicated” to exclude SpaceX.

“We’ve never divested from a single company,” he said. “We’ve done sector-based exclusion only,” so blacklisting SpaceX “would be unprecedented for us and it is not simple.”

Instead, Levine says he plans to push for a more democratic corporate governance process from within.

Musk can’t be allowed to “disempower” shareholders, he said, adding that investment professionals in New York have told him they want him to “keep fighting on this.”

Counterpoint: 

1. Musk apparently is allowed to disempower shareholders,
2. Pushing Elon Musk for a more democratic corporate governance process “from within” absolutely will not work, come on, and
3. Not buying SpaceX stock is obviously much simpler than buying SpaceX stock and trying to get Elon Musk to listen to your complaints about it, and it is a weird artifact of modern markets that Levine could think otherwise.

One thing that you sometimes hear is that the modern multimanager multi-strategy “pod shop” hedge funds are an evolution of the fund-of-funds. A fund-of-funds is a fund that raises money from investors and allocates it to different hedge funds. Ideally, the fund-of-funds does some due diligence to make sure that the hedge funds are doing a good job; it constructs a portfolio of hedge funds with good independent strategies and sources of returns; it monitors the hedge fund managers’ performance and moves money out of the funds that stop performing well. For this — and for giving investors access to the underlying funds — the fund-of-funds charges its investors fees, on top of the fees that the underlying funds charge.

A pod shop performs a similar function but keeps the underlying hedge funds in-house: Instead of allocating capital to a bunch of independent hedge funds, the pod shop hires the managers of those hedge funds, sits them in the same office, and allocates capital to them. The advantages of this are numerous. The pod shop can move capital among portfolio managers much more quickly, rapidly cutting off managers who perform badly and scaling up managers with good opportunities. Its due diligence and performance monitoring can be more thorough and continuous. It can be more thoughtful about making sure that the managers’ sources of return are independent, and about hedging shared risk. Maybe it can save money on data subscriptions and office space. The main feature of a fund-of-funds — paying the portfolio managers fees on their returns, and adding an extra layer of fees on top — is preserved, but the discipline and measurement and risk management are tightened up.

I think the judgment of the market has been pretty clear that the pod shop is a better mousetrap, and a lot of money has flowed into them. There are, however, some disadvantages, which have become more apparent in recent years. A key difference between a pod shop and a fund-of-funds is that a portfolio manager who manages money for a fund-of-funds is her own boss and can manage money for other investors too, while a portfolio manager who manages money for a pod shop is an employee of that pod shop. [2] This means that there are bidding wars for portfolio managers: If some portfolio manager is very good, she can only work at one of Point72, Millennium, Citadel, etc.; they will compete to hire her, and she will have a lot of leverage. She will exercise that leverage to demand a very large cut of her returns with a large guarantee, which will make her very expensive for her employer and its investors. The fixed costs of a pod shop are enormous. Also, whichever fund does hire her will demand that she sign a long non-compete preventing her from working for another fund for a year or two after she leaves. That, combined with the short-term and mercenary nature of pod-shop employment, means that a lot of the best portfolio managers will be on gardening leave at any time.

So perhaps the next natural evolution is a step back toward the fund-of-funds model. What you might want is a pod shop model where:

• The pod shop can still rapidly move capital among portfolio managers, scaling up good managers and turning off bad ones.
• The pod shop still has minute-by-minute visibility into the portfolio managers’ trades, and can risk-manage and hedge them.
• The pod shop still pays the portfolio managers a big cut of their returns, and charges some extra fees for itself.
• But the pod shop doesn’t have to pay huge fixed guarantees to the portfolio managers, because they are not exclusive employees of the pod shop and there are no auctions for their services.
• And, because the portfolio managers aren’t employees of the pod shop or of its competitors, the pod shop doesn’t have to wait out two years of gardening leave before it can start allocating capital to a new portfolio manager.

From the portfolio manager’s side, this is sort of a gig economy: You run a team, your team produces investment ideas, those ideas get fed into the computers of like four big pod shops, some or all of the four big pod shops allocate capital to your ideas based on how much their computers like them and how much capital they have already allocated to similar ideas, and you get paid a cut of the returns that your ideas generate on the capital allocated to them. [3] The capital can come and go on a moment’s notice, and your job is not really to implement the trades (the pod shops will do that). You might not even know how much capital is being traded based on your ideas — the pod shops do the trading, not you — but you get paid if the ideas work. And you can come and go on a moment’s notice: If you sign up another pod shop to pay for your ideas, your current stable of pod shops won’t object; if you stop selling your ideas to one pod shop, it will just go buy from someone else. The pod shop’s advantage is not in employing you; it’s in having a good model for figuring out how much capital to allocate to your ideas and when.

I guess this model is, loosely speaking, called “buy-side alpha capture.” We talked last week about how Citadel is working on a new alpha capture program to “collect trading signals from external discretionary managers,” use those signals in its own trading, and pay the external managers for the signals. “If your alpha comes from being very good at evaluating portfolio managers, you should try to find more portfolio managers to evaluate,” I wrote. And on Friday, Bloomberg’s Liza Tetley and Nishant Kumar reported:

Point72 Asset Management is exploring ways to tap trading intelligence from external hedge funds, as rivals such as Citadel race to collect such signals from outsiders.

The firm has hired alpha-capture veteran Ricky Nardis, who is set to start at Point72 mid-next year and may look at building a program that collects trading insights from other hedge funds, people familiar with the matter said, asking not to be identified discussing private information. …

Some of the industry’s largest players have established, or are looking at building so-called buy-side alpha capture programs, which collect trading data or ideas from outsiders in exchange for a fee. Ken Griffin’s Citadel is also preparing to launch a new program that will collect trading insights from other hedge funds to feed into its own quantitative strategies.

Better than hiring the outsiders on $100 million guarantees, maybe. Though you might notice the problem here, which is that their alpha capture guy “is set to start at Point72 mid-next year.” He still has a gardening leave.

If you run a big alternative asset management firm, you will frequently go out and raise funds from institutional investors. Each fund will be structured as a limited partnership, and there will be a limited partnership agreement setting out the terms of the investments, the rights of the investors, the fees, etc. Some of the investors will also have side letters that modify the terms for their investment.

You will do a lot of these — each fund will have its own LP agreement and side letters with several investors — and, while they will not all be exactly the same, there will be a certain family resemblance. In part because that makes sense — your relationship with your investors shouldn’t change all that much from fund to fund, or from investor to investor — but also in part for the practical reason that, when you set up a new fund, the associate at your law firm will open the final Word version of the LP agreement for your most recent fund, change the names, and circulate that as the LP agreement for the new fund. They’re not, like, sitting down with a blank piece of paper and waiting for inspiration to strike. They’re not just copying and pasting, oh no, the market evolves and your lawyers are undoubtedly staying up to speed on the latest legal and commercial developments and drafting new artisanal contract language to reflect those developments. But are they mostly copying and pasting? Well.

This is obviously a process that evolves with technology. In the very olden days, the associate would have to pull down a bound volume with the old LP agreement and hand it to a secretary to retype; the cutting (with scissors) and pasting (with paste) were literal. In modern times, Microsoft Word can “replace all” to change the names. But also AI. The Financial Times reported last week:

Kirkland & Ellis has agreed a multiyear deal with Palantir to develop AI technology to help it advise private equity groups on raising money from investors such as pension funds.

The world’s highest-grossing law firm, which advises the largest private equity houses on raising multibillion-dollar funds, said it would use the Palantir technology to make the expertise of its top partners available to more than a thousand of its lawyers.

The Palantir tool would be used for fund documentation, to help draft side letters, and to keep track of private equity firms’ agreements with their investors and monitor compliance with them, the law firm said. It can also help the firm advise on continuation vehicles, the increasingly popular deals in which private equity firms sell companies to themselves. 

“It became really important for us to take all [our] institutional knowledge and senior partner judgment and embed that into an AI system,” said Erica Berthou, a partner in Kirkland’s investment funds practice. “There is no doubt that this will speed up and make the complex fundraising market system more efficient.”

I will say, the cutting and pasting is one thing, but asking “hey what fees are we actually charging on this fund” and having the AI quickly read dozens of side letters and tell you the answer seems useful.

I wrote yesterday about a half-joking model in which artificial intelligence ends up producing all of the goods and services, rendering human employment obsolete, for better or worse. This is perhaps a helpful upper bound on the impact of AI, but it’s not all that realistic. AI is unlikely to do everything. But there are toned-down versions of this model that people do worry about. “AI will take all of the cushy white-collar jobs, but physical human labor will still be needed to construct the data centers”? Here’s this:

Meta Platforms … is starting a “workforce academy” to train Americans to build its data centers as skilled trade workers become a sought-after commodity. The five-week training program, in partnership with CBRE and the Associated Builders and Contractors, is free of charge and guarantees graduates a job at a Meta data-center construction site, the company said. ...

Meta is already spending hundreds of billions of dollars to build out the infrastructure it thinks it needs to compete in the artificial intelligence race. It recently laid off 8,000 white-collar employees in part to fund those efforts. 

Would it have been more efficient for Meta to go to its 8,000 surplus metaverse engineers and be like “bad news, we don’t need you to build the metaverse anymore, but good news, we do need you to build data centers, so off you go to retrain as an electrician”? Presumably it will pay the data-center construction workers less than it paid the laid-off computer programmers.

It is my curse to keep writing about the volatility-smoothing hedging potential of sports betting, but here’s this:

Austin Sagan … is a network planning analyst for American Airlines, and for the past year his specialty has been special events. Sometimes they’re predictable. The Kentucky Derby has come to Louisville on the first Saturday of May for nearly a century. Coachella is in the same valley every April. 

Sometimes, they’re not. When Bad Bunny or Taylor Swift announce a tour, Sagan jumps into action, setting up American’s flying schedule to help fans get to shows. During single-elimination tournaments, he’s researching teams’ fans and tracking every game to ensure American has the right number of flights within minutes of the final buzzer. ….

He leans on colleagues who are more tuned-in to the intricacies of sports fandom, and isn’t above texting friends for insights on matchups or rivalries. 

Sagan’s boss’ boss, Brian Znotins, saw during the last World Cup that Argentinians are the most likely to follow their team. So if Argentina looks poised for victory in a knockout round, Sagan and his team will be standing by with flights to the next game before the final whistle.

That Wall Street Journal article does not go on to say “so he has started trading multimillion-dollar sports event contracts with Susquehanna on Kalshi to hedge the revenue risk of Argentina’s World Cup results,” but you just know Kalshi started calling him the minute the article published. “You have never bet on a sports game,” I wrote last week, “or met anyone who has bet on a sports game, to hedge some existing economic risk.” The universe, and Kalshi and Susquehanna, are conspiring to prove me wrong.

Elsewhere: Is Kalshi responsible for “My mayor: Muslim. My bagel: Jewish. My Christian: Dior. Knicks in four”? That would be kind of cool.

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