Hedge funds hit by Tesla’s surprise rally after shorting stock

Hedge funds increased their short bets against Tesla Inc. just before the company revealed impressive vehicle-sales results, driving a 40% surge in its share price since June. About 18% of hedge funds tracked by Hazeltree were short on Tesla at June's end, up from 15% in March. Tesla's strong second-quarter delivery figures exceeded expectations, posing potential losses for short-sellers. The company is predicted to return to profit growth next year..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..Join us for BizNews' first investment-focused conference on Thursday, 12 September, in Hermanus, featuring top experts like Frans Cronje, Piet Viljoen, and more. Get insights on electricity and exploiting SA's gas bounty from new and familiar faces. Register here..By Sheryl Tian Tong Lee and Ishika Mookerjee.Hedge funds piled into short bets against Tesla Inc. right before the electric vehicle maker unveiled a set of numbers that triggered a hefty share-price rally. .___STEADY_PAYWALL___.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..Read more: 🔒 Only Tesla's AI Robotaxi can save investors now: Liam Denning.Those contrarian bets now threaten to saddle the hedge funds behind them with losses. Tesla's 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 company's shares to a six-month high. Since the beginning of June, Tesla's 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.'s Seth Goldstein, one of the top three analysts covering the stock in a Bloomberg ranking that tracks price recommendations..The company will likely "return to profit growth" next year, he said in a note to clients. But how Tesla handles the market's 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 — a key plank in the global race to reach net zero emissions by 2050 — benefits from generous tax credits. Yet it's also contending with significant hurdles in the form of tariff wars and even identity politics, with some consumers rejecting EVs as a form of "woke" transport. .Visitors inspect a Tesla Inc. Cybertruck during the Cyber Odyssey tour at the CaixaForum in Madrid. Photographer: Magda Gibelli/Bloomberg.In the US, Donald Trump has said that if he becomes president again after November's election, he'll undo existing laws supporting battery-powered vehicles, calling them "crazy." That said, Trump is a "huge fan" of Tesla's Cybertruck, according to Elon Musk, the EV giant's 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, Tesla's 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 "very difficult for us to position," said Fabio Pecce, chief investment officer at Ambienta where he oversees $700 million, including managing the Ambienta x Alpha hedge fund. .Basically, it's not clear whether investors are dealing with "a top company with a great management team" or whether it's "a challenged franchise with deficient corporate governance," he said. .Read more: 🔒 Tesla faces losing its EV market dominance in America.However, "if Trump wins, it is truly going to be very positive" for Tesla, though "obviously not amazing for EVs and renewables in general," he said. That's because Trump is expected to impose "massive tariffs towards the Chinese players," which would be "beneficial" to Tesla, Pecce said..Investors ended 2023 declaring they'd 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 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, 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 "valuations in the EV space are so beat up" that he's now avoiding shorting the sector. It's no longer an obvious contrarian bet, because those tend to do best if investors enter "when things are a little bit higher," he said. But at this point, "a lot of the air's already come out of the balloon.".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 "way too many" startups that remain "sub-scale" and with gross margins that are simply "too low," he said. As a result, the supply-demand dynamic of the EV market "is still very negative." ."Ultimately, I think you need to see more bankruptcies" before the market starts to look healthier, Hogner said. .Read also:.🔒 Institutional investors flee Tesla amid growth concerns: What next for the electric car giant?Tesla shareholders support Musk's pay plan and Texas moveTesla embraces China's data for self-driving revolution.© 2024 Bloomberg L.P.

Hedge funds hit by Tesla’s surprise rally after shorting stock

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