This week, hedge funds learned not to fight the Fed… or Elon Musk

May 10, 2013
May 10, 2013

It’s been a tough week for hedge funds.

First, the SkyBridge Alternatives conference in Las Vegas, one of two big hedge-fund bashes this week, put fund managers’ love of embarrassing dad-rock on full display. Then the other, the Ira Sohn Investment conference in New York, reminded us that, for all their exertions, passively-managed equity index funds still out-perform hedge funds, regardless of their strategy. Part of the reason for that discrepancy, despite all the hedge funders’ crankiness about easy monetary policy leading to inflation, crippling debt and the like, is that you can’t fight the Fed.

But hedge funds also can’t fight Elon Musk, at least right now.

The serial entrepreneur’s electric car maker, Tesla, is shooting up the stock charts, thanks in part to its positive earnings report yesterday and first-ever profit. So far, today alone it has gone up by 12.85%. It’s not just because of the results. Investors suspect a short squeeze, which is when speculators who have bet that a stock will fall instead get caught in a cycle of rising prices. It’s one that has made newcomer Tesla a more valuable company than venerable Fiat, at least temporarily:

Tesla-s-stock-price-this-week_chart (3)

Reuters reports that more than 60% of the company’s stock was lent out to short-sellers in April. They hoped to return the stock to its owners after the price fell, keeping the difference. It’s a popular bet among speculators, and more people were climbing on the short bandwagon this week ahead of the earnings report.

They had good reason to be suspicious of electric car stocks, of course: the failure of fellow electric-car maker Fisker, and the broader problems introducing a radically different product to a well-established market. Then there was Musk’s propensity for over-promising good news about his company and then disappointing.

But when he didn’t disappoint, shares started rising. Shorts got nervous and began buying the stock back. But most of Tesla’s shareholders are institutional investors, and others are true believers in either Musk or the future of electric cars. That is, they’re buy-and-hold type investors who aren’t interested in selling. But shorts really, really need to buy back the stock to avoid more losses, and so prices are going up, reinforcing the cycle.

It’s an expensive bet to lose. But of course, it’s still no guarantee about the long term prospects of Tesla’s stock, or the company’s performance.

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