A long-established hedge fund trading strategy centred on stock index rebalancing has generated outsized profits for hedge funds this year, helped by record trading volumes and the landmark public listing of SpaceX, according to a report by the Financial Times.
The strategy involves buying shares expected to be added to major equity indices, or selling those likely to be removed, ahead of passive index-tracking funds rebalancing their portfolios. With a series of major index changes taking place during the second quarter, hedge funds specialising in the trade benefited from an unusually favourable environment.
According to market estimates, index rebalancing events generated approximately $1.3tn of trading activity during the second quarter, the highest quarterly level on record and around double the average seen last year. The activity included scheduled changes to the S&P Dow Jones and Russell indices, as well as SpaceX’s inclusion in the Nasdaq 100 following its blockbuster stock market debut.
Analysts estimated that SpaceX’s addition to the Nasdaq 100 alone prompted around $4.3bn of buying from passive investment funds, creating a significant opportunity for traders positioned ahead of the index changes.
The scale of the opportunity particularly benefited large multi-strategy hedge funds with access to substantial balance sheets and financing, allowing them to build sizeable positions before index funds executed their mandatory trades.
Millennium Management was among the biggest beneficiaries. Reports indicate two of the firm’s index rebalancing teams generated combined profits of around $3.7bn during the month, underscoring the potential returns available when unusually large index events coincide.
The profits represent a sharp turnaround for the strategy after a difficult period. Earlier in 2025, heightened market volatility reportedly contributed to significant losses for some index rebalancing teams, while competitors including Citadel and ExodusPoint Capital Management had previously scaled back their exposure to the strategy following weaker performance.
Market participants noted that success in index rebalancing depends not only on correctly anticipating index changes, but also on the ability to deploy large amounts of capital, execute trades efficiently and accurately predict the scale of passive investment flows.
Attention is now turning to future large-scale listings expected to join major indices, with anticipated initial public offerings from AI companies potentially creating further opportunities. Recent rule changes by index providers have also accelerated the inclusion process for newly listed mega-cap companies, making index rebalancing an increasingly important event for hedge funds seeking short-term trading opportunities.
Despite concerns that blockbuster IPOs could cause significant market disruption, analysts note that many newly listed companies initially have relatively limited free floats, meaning the size of passive buying required for index inclusion is often smaller than their overall market capitalisation would suggest.
