Mundane trade fuelled large Wall Street windfall as indices rebalanced
Betting on which companies’ stock will be added or dropped has made a lucrative comeback this year
A banal strategy of profiting from changes in stock index membership is emerging as one of the hottest trades on Wall Street, as volatility and the historic SpaceX listing rippled through markets last quarter.
The trade involves buying stocks set to join — or selling stocks set to be dropped — from various stock indices, before passive index-tracking funds adjust their portfolios. Last quarter saw record trading volumes, giving hedge funds that specialise in the strategy multiple chances to make money.
Index rebalancing events generated a record $1.3tn in trading flows during the second quarter, according to data compiled by Min Moon, the head of global index and delta one strategy at JPMorgan Chase.
That figure is double the quarterly average last year and roughly equal to the entire trading volume in 2022. These changes included the reconfiguration of the S&P Dow Jones and Russell indices, as well as the addition of SpaceX into the Nasdaq 100, as traders took leveraged bets that billions of dollars in flows from passive investors would lift the stock.
“You just [landed] heads four times in a row,” said an executive at a multi-manager hedge fund that trades the strategy.
He added that it was one of the biggest ever months for the strategy.
While the tactic is relatively straightforward, generating substantive profits requires a huge amount of capital, meaning only the largest hedge funds have the firepower to do well.
“You are just anticipating the flows” from passive index funds, said one senior New York-based equity portfolio manager. “The edge comes from being faster and more accurate, your entry and exit points, and sizing.”
The stars aligned for index rebalancing last month, netting billions of dollars across the industry as SpaceX went public in the largest public listing on record. Analysts at JPMorgan estimated that SpaceX’s inclusion in the Nasdaq 100 alone would pull in $4.3bn in passive funds, boosting the share price.
Around the same time, the Russell reconstituted its holdings, and S&P rebalanced the proportions of various companies in its indices.
Two teams at Millennium Management, the $92bn multi-strategy hedge fund led by Izzy Englander, made a combined $3.7bn last month, a profit practically unheard of during such a short period. The first team, called SRBL after the initials of the group’s primary portfolio managers running the strategy, is led by New York-based Glen Scheinberg. Pratik Madhvani runs the other out of Dubai. Bloomberg reported earlier on Millennium’s rebalancing haul.
Larger firms had an advantage over specialist players because of their ability to borrow large sums from their bank brokers to scale up their bets in the one month of the year that it counts, said one of the hedge fund executives.
“I’ve been waiting for this moment when we were going to see that some big player got back into it and made a ton of money,” said Marco Sammon, an associate professor at Harvard Business School. “With any strategy that involves risk, there will be cycles.”
The rebalancing of the group of Russell indices at the end of June was expected to generate nearly $150bn in net trading activity, according to an analysis by Stephens.
Millennium, the biggest player in the trade, has held on to its index-rebalancing teams even through big losses in recent years. In the first few months of 2025, those same trading teams reportedly lost $900mn as volatility roiled markets. Rivals such as Citadel scaled back their index-rebalancing strategy in 2024, while ExodusPoint pared back its strategy the year prior.
“It’s not a cool, sexy thing that’s new,” said one hedge fund executive. “But every once in a while there’s something that makes everything weird, when something with that big of a valuation comes in,” they added, referring to SpaceX’s IPO.
Stock indices raced to change their rules in order to make way for a speedy entry for SpaceX, which will similarly pave the way for this year’s other new blockbuster listings to join their ranks, including Anthropic and OpenAI.
“This is a bit supernormal,” said one adviser in the hedge fund industry, referring to the anticipated upcoming listings for the AI companies.
Nasdaq made a bevy of changes in May to make way for SpaceX. It slashed its minimum float requirement, introduced a fast track to its Nasdaq 100 for megacap companies and changed its index weight calculation rules. Rival index providers Morningstar CRSP and Russell similarly changed their rules.
Yet most indices weight their holdings of companies based on a company’s float or the shares that are available to trade. Since SpaceX only had a $75bn float when it first listed, a small fraction of its overall market valuation, it had a smaller impact on index rebalancing than it might have otherwise.
Melissa Roberts, a managing director for Stephens who has analysed index rebalancing for two decades, said that because these huge public listings were entering the market with relatively small floats, there would not be instantaneous cataclysmic effects for indices.
“They’re not coming in and disrupting everything,” she said. “The market will have time to adjust.”