This fund that lets retail traders invest in SpaceX and OpenAI is trading at a massive premium

Published Tue, Apr 23 20241:01 PM EDTUpdated Tue, Apr 23 20241:53 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

A new fund designed to give retail investors a way to buy into private companies like SpaceX has seen huge demand in its first few weeks, creating a massive premium for the fund and confusion on a popular brokerage app. The Destiny Tech100 is a closed-end fund that trades on the New York Stock Exchange under the ticker "DXYZ." In less than a month of trading, the fund has already seen massive price swings in both directions, even though its underlying valuation has been effectively static. The fund had a net asset value, or estimated value of the underlying holdings, of $4.84 per share as of Dec. 31. But the fund itself has been trading well above that ever since it launched on March 26. On April 8, the fund traded as high as $105 per share. On Monday, it closed at $24.69 per share, a premium of over 400%. DXYZ 1M mountain The Destiny Tech 100 fund has seen big swings and is trading well above its net asset value. The premium is notable not only for its size but also because closed-end funds often trade at a discount to NAV. "It's common for them to not trade exactly at their NAV, but trading at a premium is very strange. Because if you're doing that, you're effectively saying you don't believe in the NAV," said Jack Shannon, senior manager research analyst for Morningstar. The run-up since the fund launched has come even with large public tech stocks struggling, which suggests that the private valuations aren't surging. Some of Destiny's holdings, like OpenAI and SpaceX, are already valued at tens of billions of dollars. "I just don't think that people realize that some of the companies in here already have massive valuations, so when you're paying a 10x or 20x, or 8 or 6x, premium on it, you're multiplying that valuation by that number. And it gets pretty astronomical," Shannon said. One potential reason for the premium is that retail investors, who often don't have the qualifications or the capital to invest in private companies, have high demand for those opportunities. "It is a really great example of the investor demand for retail investors to be able to access private markets through an investment vehicle that they're eligible for," Chelsea Childs, a partner at law firm Ropes & Gray, told CNBC. In a way, that demand could be a sign that the fund's idea is a success, even if the premium proves unsustainable. Sohail Prasad, the CEO of the fund's parent company Destiny XYZ, said he wants the fund to be the SPDR S & P 500 ETF Trust (SPY) for private tech companies. However, with a management fee of 2.5%, the fund is significantly more expensive than index ETFs. Robinhood confusion The popularity of the new fund appears to have caused some confusion on the retail brokerage app Robinhood . According to Prasad, the Destiny fund was previously available for trading on brokerage Robinhood, but they started seeing complaints last week that things had changed. Users were also given inconsistent answers as to why they were not able to buy the fund, according to Prasad and screenshots shared by Destiny. "So this happened [last week] without any communication to us or to their customers. People woke up one day and saw that there was no buy button, only a sell button. So that part is pretty disappointing," Prasad said. Robinhood declined a request from CNBC to discuss the specifics around the Destiny fund, but its help center website says that closed-end funds are not available for trade. The confusion around trading on Robinhood is reminiscent of the height of the meme-stock era when Robinhood had to restrict trading on certain stocks that were extremely popular with retail traders. However, there is no indication that the restrictions around Destiny are related to some of the same risk-management concerns for Robinhood surrounding the meme-stock trading. Stock sales ETFs and mutual funds allow creations and redemptions, which helps to close the gap with any premium or discount. But with closed-end funds, doing so is tricky. While funds like Destiny have a board of directors and a fund sponsor, which have a duty to consider actions that would be in the best interest of shareholders, "there's not a strict rule" about what actions need to be taken, Childs said. The fund itself is planning to issue additional shares, which could help lower the premium by creating additional liquidity. Destiny said in an April 16 filing that it plans to sell up to $1 billion in additional shares. Prasad said the sale is part of a larger plan to round out the fund, which does not have a position in 100 private companies yet. "Our focus is not on the premium," but on building out the fund, Prasad said. The fund's parent company Destiny XYZ, and by extension Prasad, has also sold some of its shares of the fund. Prasad said in a statement that the proceeds will be used to improve the company.