SpaceX is heading to the stock market with a potential $2 trillion valuation, and some investors can already buy shares through a mutual fund, but the investment structure is far more complicated than the hype suggests. The rocket company, which merged with Elon Musk's artificial intelligence startup xAI (formerly Twitter's Grok division), filed key paperwork just before Memorial Day weekend. The IPO could make Musk the world's first trillionaire on paper, but for everyday investors trying to get in early through Baron Partners mutual fund, the reality involves hidden complexities that financial advisers are flagging as risky.

What's Actually Inside the Baron Partners Fund?

Baron Partners, a well-established mutual fund with a strong 30-year track record, holds 29.6% of its assets in SpaceX, according to its website. That means roughly 30 cents of every dollar you invest goes into the private rocket company, with another 19 cents going into Musk's Tesla electric vehicle company. The fund has seen massive inflows this year, pulling in $2.8 billion in new investor money, equal to nearly 30% of its total current assets, as SpaceX mania surged.

But here's where things get murky. The fund's managers refuse to explain how they arrived at that 29.6% valuation figure. Baron Partners and its public relations firm won't discuss the methodology, even though the fund is a publicly regulated investment vehicle under the Investment Act of 1940, meaning ordinary shareholders should have access to this information.

Why Are Preferred Stocks Creating Confusion?

The real problem lies in what type of SpaceX shares Baron Partners actually owns. As of March 31, two-thirds of the fund's reported SpaceX stake, worth about $2.56 billion out of $3.89 billion total, consists of preferred stock rather than common stock. Preferred stocks are complex financial instruments that often behave more like bonds than regular shares, and their conversion terms to common stock remain unclear.

The SpaceX prospectus lists 16 different preferred stock classes from SpaceX itself, plus six additional preferred stock classes from xAI. Which ones does Baron Partners own? What are the exact conversion terms? The fund won't say. This matters enormously because the price you pay for a security directly affects your potential returns, and if you're buying into Baron Partners hoping to get SpaceX at a pre-IPO discount, you deserve to know what price you're actually paying.

"This stuff is a lot more complicated than you think it is, and there's a lot going on behind the scenes," said Larry Glazer, managing partner of Mayflower Advisors in Boston.

Larry Glazer, Managing Partner at Mayflower Advisors

What Are the Key Risks Investors Should Know About?

• Leverage Exposure: Baron Partners uses 13% leverage, meaning it borrows against its assets to amplify returns. This strategy boosts gains when investments perform well but magnifies losses during downturns.
• Concentration Risk: The fund's combined 49.6% exposure to SpaceX and Tesla creates extreme concentration. Financial advisers warn this level of concentration in a single fund is unusually risky and speculative.
• Fee Structure: Baron Partners charges 2% in annual fees, which is significantly higher than typical index funds and eats into returns over time.
• Dilution Effect: As new money pours into the fund, it gets allocated a proportionate share of existing SpaceX holdings, diluting existing investors' stakes. New investors will experience the same dilution when subsequent investors join.
• Other Holdings Drag: The fund's other major holdings include Charles Schwab (down 10% year-to-date), FactSet (down nearly 20%), and Gartner (down nearly 40%), which have dragged the overall fund down 2% since January 1.

Fund founder Ron Baron, now 83, has appointed his son Michael as co-manager. While Ron Baron has an impressive long-term investment record, there's no particular reason to expect his son will beat market indexes over time, as almost no fund managers do consistently.

How Should Investors Approach SpaceX Pre-IPO Exposure?

Financial advisers are urging caution. John Coumarianos, a financial adviser at Mindful Advisory in Short Hills, New Jersey, warns that Baron Partners' massive exposure to SpaceX and Tesla makes it far riskier than many investors realize. He views Baron Partners as a highly speculative satellite holding and recommends limiting exposure to a small percentage of a diversified portfolio.

"From a portfolio-construction standpoint, many investment advisers, myself included, balk at this level of concentration in a fund," stated John Coumarianos, financial adviser at Mindful Advisory.

John Coumarianos, Financial Adviser at Mindful Advisory

The hype surrounding SpaceX's IPO will likely drive short-term demand for shares, and index funds benchmarked against the S&P 500 will be forced to buy significant amounts of SpaceX stock once it's added to the index. This could create a short-term price pop. However, the complexity of Baron Partners' holdings, combined with the fund's other underperforming stocks and high fees, means that buying into the fund specifically for SpaceX exposure may not be the straightforward pre-IPO play it appears to be.

Ron Baron himself has been bullish on SpaceX's long-term prospects, telling CNBC that he believes the company could be worth $10 trillion, $20 trillion, or even $30 trillion over the next 10 to 15 years. But the gap between his public enthusiasm and his refusal to explain how his valuations are calculated raises red flags about the kind of hype that can drive investment bubbles.