Hedge Funds That Piled Into Big Tesla Short Stung by Huge Rally
(Bloomberg) โ Hedge funds piled into short bets against Tesla Inc. (TSLA) right before the electric vehicle maker unveiled a set of numbers that triggered a hefty share-price rally.
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About 18% of the 500-plus hedge funds tracked by data provider Hazeltree had an overall short position on Tesla at the end of June, the highest percentage in more than a year, according to figures shared with Bloomberg. That compares with just under 15% at the end of March.
Those contrarian bets now threaten to saddle the hedge funds behind them with losses. Teslaโs latest vehicle-sales results, published on July 2, revealed second-quarter deliveries figures that beat average analyst estimates, even though sales were down. Investors pounced on the news, driving the companyโs shares to a six-month high. Since the beginning of June, Teslaโs share price has now soared about 40%.
Tesla is likely to see its profit margins improve, helped by lower production and raw material costs, according to Morningstar Inc.โs Seth Goldstein, one of the top three analysts covering the stock in a Bloomberg ranking that tracks price recommendations.
The company will likely โreturn to profit growthโ next year, he said in a note to clients. But how Tesla handles the marketโs intensifying focus on affordable EVs will be key, he added.
The development feeds into an ongoing sense of uncertainty around how to treat the wider EV market, amid a sea of conflicting dynamics. The industry โ a key plank in the global race to reach net zero emissions by 2050 โ benefits from generous tax credits. Yet itโs also contending with significant hurdles in the form of tariff wars and even identity politics, with some consumers rejecting EVs as a form of โwokeโ transport.
In the US, Donald Trump has said that if he becomes president again after Novemberโs election, heโll undo existing laws supporting battery-powered vehicles, calling them โcrazy.โ That said, Trump is a โhuge fanโ of Teslaโs Cybertruck, according to Elon Musk, the EV giantโs chief executive officer.
Meanwhile, the list of internal disruptions at Tesla is long. In April, Musk told staff to brace for major job cuts, with sales roles among those affected. And the Cybertruck, Teslaโs first new consumer model in years, has been slow to ramp up.
For that reason, some hedge fund managers have decided the stock is off bounds altogether. Tesla is โvery difficult for us to position,โ said Fabio Pecce, chief investment officer at Ambienta where he oversees $700 million, including managing the Ambienta x Alpha hedge fund.
Basically, itโs not clear whether investors are dealing with โa top company with a great management teamโ or whether itโs โa challenged franchise with deficient corporate governance,โ he said.
However, โif Trump wins, it is truly going to be very positiveโ for Tesla, though โobviously not amazing for EVs and renewables in general,โ he said. Thatโs because Trump is expected to impose โmassive tariffs towards the Chinese players,โ which would be โbeneficialโ to Tesla, Pecce said.
Investors ended 2023 declaring theyโd likely retreat further from green stocks in general, and EVs specifically, according to a Bloomberg Markets Live Pulse survey. Almost two-thirds of the 620 respondents said they planned to stay away from the EV sector, with close to 60% expecting the iShares Global Clean Energy exchange-traded fund to extend its slide in 2024. The ETF has lost 13% so far this year after sinking more than 20% in 2023.
The Bloomberg Electric Vehicles Price Return Index, whose members include BYD Co., Tesla and Rivian (RIVN) Automotive Inc., is down about 22% so far in 2024. At the same time, the metals and minerals needed to produce batteries are at the mercy of wildly volatile commodities markets, with speculators regularly trying to make a quick buck on shifts in supply and demand. Price volatility means some battery manufacturers are having to adjust to a market in which their profit margins have been getting badly squeezed.
Against that backdrop, more traditional automakers are finding themselves under pressure from shareholders to slow down their capital expenditure on EVs, with recent examples including Porsche AG. Polestar Automotive Holding UK Plc (PSNY), a high-end EV manufacturer, has lost almost 95% of its value since being spun out of Volvo Car AB two years ago. Fisker Inc., another luxury EV maker, saw its value wiped out starting last year and has since filed for Chapter 11 bankruptcy protection.
Soren Aandahl, founder and CIO of Texas-based Blue Orca Capital, said โvaluations in the EV space are so beat upโ that heโs now avoiding shorting the sector. Itโs no longer an obvious contrarian bet, because those tend to do best if investors enter โwhen things are a little bit higher,โ he said. But at this point, โa lot of the airโs already come out of the balloon.โ
But Eirik Hogner, deputy portfolio manager at $2.7 billion hedge fund Clean Energy Transition, suggests there may be more pain to come for the wider EV industry. There are still โway too manyโ startups that remain โsub-scaleโ and with gross margins that are simply โtoo low,โ he said. As a result, the supply-demand dynamic of the EV market โis still very negative.โ
โUltimately, I think you need to see more bankruptciesโ before the market starts to look healthier, Hogner said.
โWith assistance from Craig Trudell.
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