"The Short Seller Killer" Returns! Tesla rebounds over 80% to hit a new high for the year, causing heavy losses for short-selling hedge funds

According to the Zhitong Finance and Economics APP, before the electric car manufacturer Tesla (TSLA.US) announced a series of data that caused a significant increase in its stock price, hedge funds heavily shorted the company.

Based on data from over 500 hedge funds tracked by Hazeltree, as of the end of June, about 18% of hedge funds held short positions in Tesla, the highest proportion in over a year. In comparison, this proportion was slightly below 15% at the end of March.

Hedge Funds Heavily Short Tesla

These bearish bets may now lead to losses for hedge funds. Tesla's latest car sales data released on July 2nd showed that despite a decrease in sales volume, the delivery volume for the second quarter exceeded analysts' average expectations. After the data was released, investors rushed to buy Tesla's stock, driving the company's stock price to a new high for the year. The stock has rebounded by over 80% from its low point of the year, soaring by about 40% in the past month.

It is understood that Tesla's underperformance in recent years has attracted many short sellers. However, Tesla's stock price has since risen against the trend, causing heavy losses for short sellers. Tesla CEO Elon Musk issued a stern warning last week to investors who continue to short Tesla, stating that they will be "destroyed."

Uncertainties Remain

Morningstar analyst Seth Goldstein stated that due to decreasing production and raw material costs, Tesla's profit margin may increase.

In a report, he mentioned that the company may "resume profit growth" next year. However, he added that how Tesla addresses the increasing market focus on affordable electric vehicles will be crucial.

The electric vehicle market still faces uncertainties. The industry benefits from generous tax incentives. However, the industry also faces significant obstacles such as tariff wars and identity politics, with some consumers refusing to see electric cars as a "woke" mode of transportation.

In the United States, Donald Trump has stated that if re-elected as president in November, he will abolish existing laws supporting electric cars, calling these laws "crazy." Nevertheless, Musk has stated that Trump is a "super fan" of Tesla's electric pickup truck, Cybertruck.

Meanwhile, there is significant internal turmoil within Tesla. In April this year, Musk informed employees to prepare for large-scale layoffs, with sales positions also being affected. As Tesla's first new consumer vehicle model in years, Cybertruck's sales growth has been slow.

For this reason, some hedge fund managers have decided to prohibit investing in Tesla's stock. Fabio Pecce, Chief Investment Officer of Ambienta, stated that Tesla is "difficult for us to position." He manages $700 million in funds, including the Ambienta x Alpha hedge fund Pecce said that it is basically unclear whether investors are facing "a top company with an excellent management team" or "a challenged franchise company with poor corporate governance."

However, he said, "If Trump wins, this is indeed good news for Tesla," although "obviously not good news for the electric vehicle and renewable energy industry." Pecce said this is because Trump is expected to "impose huge tariffs on Chinese companies," which will be "beneficial" for Tesla.

Tesla's stock price soared

Green stocks "fall out of favor"

According to a Bloomberg Markets Live Pulse survey, investors at the end of 2023 believed they might further withdraw from green stocks, especially electric vehicles. Among the 620 respondents, nearly two-thirds said they planned to stay away from the electric vehicle industry, with nearly 60% expecting the iShares Global Clean Energy Exchange-Traded Fund (ETF) to continue its decline in 2024. After falling more than 20% in 2023, the ETF has already dropped 13% so far this year.

The Bloomberg Electric Vehicle Price Return Index has fallen by about 22% year-to-date in 2024, with components including Tesla and Rivian (RIVN.US). Meanwhile, the volatility in the commodity market affecting metals and minerals needed for battery production has led speculators to try to profit quickly from supply and demand changes. Price fluctuations mean that some battery manufacturers have had to make adjustments to adapt to a market where profit margins are severely squeezed.

Against this backdrop, more traditional car manufacturers are facing pressure from shareholders to slow down capital spending on electric vehicles, with recent examples including Porsche. Luxury electric car manufacturer Fisker has seen its market value evaporate since last year, subsequently filing for bankruptcy protection in the United States.

Soren Aandahl, founder and chief investment officer of Blue Orca Capital based in Texas, said that the valuations in the electric vehicle sector are too high, and he now avoids shorting the industry. He stated that it is no longer a clear contrarian investment, as investments often perform best when investors enter "a little bit better situation." However, currently, "a lot of air has leaked out of the balloon."

But Eirik Hogner, deputy portfolio manager of the $2.7 billion hedge fund Clean Energy Transition, said that the entire electric vehicle industry may still suffer more pain. He mentioned that there are still "too many" startups that are "too small" with "too low" profit margins. Therefore, the supply and demand dynamics in the electric vehicle market are still "very negative." Hogner said, "In the end, I believe we need to see more companies go bankrupt for the market to start turning around."