By Felix Salmon
December 30, 2011

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Hedge funds fudge their quarter-end valuation numbers — WSJ

Maybe because they’ve been lagging the stock market since 2003 — WSJ

“100 Tweets” opening next week at Dumbo Arts Center — DAC

The STRATFOR names-and-credit-card-numbers data dump — Pastebin

MSF Shocked And Deeply Saddened By The Killing Of Two Staff Members In Mogadishu — DWB

Samoa will have no Friday this week — NYT

Did Mark Hurd woo Jodie Fisher by showing her his checking account? — All Things D

I can’t see how ruining Rakoff’s Xmas for no reason was a very smart move by the SEC — Reuters

Carrick Mollenkamp gets his first Reuters byline — Reuters

The infuriating story of Ayded Reyes — ESPN


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I’ve been wondering about a question…

Is there the potential for index funds to drive IPO values without regard to the value of the underlying company?

Take the Groupon IPO as an example — I believe the IPO sold just 6% of the outstanding shares. The trading in those shares presumably will help find a value for the remaining 94%.

But as soon as Groupon is added to an index, perhaps in a year (?), then the funds tracking that index will be strongly encouraged to buy in. If 10% of the money in the market were indexed, then there would presumably be fierce competition for the 6% of the shares that are actually trading, with the shares trading at almost any price. No? Are there any protections in the system against this happening?

Posted by TFF | Report as abusive

TFF – yes, there are protections. S&P, to take a particularly relevant example, weights most of its indices based on capitalization that reflects float only – excluding shares held by “control groups, other publicly-traded companies, and government agencies” – rather than all outstanding shares. The intent is to avoid exactly the problem that you discuss.

Details are in S&P’s “Float Adjustment Methodology” white paper at this link - index-library/en/us

Posted by realist50 | Report as abusive

Thanks, realist. I still have trouble trusting index funds, but given their popularity it is comforting to know that people have given thought to at least some of the potential flaws.

Posted by TFF | Report as abusive