Electric vehicle manufacturer$Tesla (TSLA.US)$released a series of data that caused a significant increase in stock prices, hedge funds heavily shorted the company.

According to data from more than 500 hedge funds tracked by Hazeltree as of the end of June, about 18% of hedge funds held short positions on Tesla, the highest proportion in more than a year. By contrast, this proportion was slightly below 15% at the end of March.

These bearish bets may now hurt hedge funds. Tesla's latest car sales data, released on July 2, showed that despite a drop in sales, deliveries in the second quarter exceeded analysts' average expectations. Investors bought Tesla shares after the data was released, pushing the company's stock price to an annual high. The stock has rebounded more than 80% from its annual low and soared about 40% in the past month.

It is understood that Tesla's poor performance in the past few years has attracted many short sellers. However, Tesla's stock price has risen against the trend, causing short sellers to suffer heavy losses. Tesla CEO Elon Musk issued a stern warning last week to some investors who continued to short Tesla, saying they would be "obliterated".

As of publication, Tesla's pre-market trading in the US has fallen more than 1%; the previous trading day, Tesla rose more than 2%.

Uncertainty remains.

Morningstar analyst Seth Goldstein said that Tesla's profitability may improve as production and raw material costs decline.

In a report, he said the company may "resume profit growth" next year. But he added that how Tesla responds to the market's increasing focus on affordable electric cars will be key.

The electric car market still faces uncertainty. The industry benefits from generous tax incentives. However, the industry also faces major obstacles such as tariff wars and even identity politics, and some consumers refuse to see electric cars as an "awakening" mode of transportation.

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

Meanwhile, the chaos within Tesla is also very serious. In April of this year, Musk told employees to prepare for mass layoffs, and sales positions will also be affected. And as Tesla's first new consumer model introduced in years, Cybertruck sales have grown slowly.

For this reason, some hedge fund managers have decided to prohibit investments in Tesla stock. Fabio Pecce, chief investment officer of Ambienta, said Tesla is "hard to place for us". He manages $700 million, including the Ambienta x Alpha hedge fund.

Pecce said that basically, it is not yet clear whether investors are facing a "top company with excellent management team," or a "franchise company facing challenges and poor corporate governance".

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

"Green stocks" are falling out of favor.

According to a Bloomberg Markets Live Pulse survey, investors believe they may further withdraw from green stocks, especially electric vehicles, by the end of 2023. Among the 620 respondents, nearly two-thirds said they planned to stay away from the electric vehicle industry, and nearly 60% expected iShares Global Clean Energy Exchange-Traded Fund (ETF) to continue to decline in 2024. The ETF, which fell more than 20% in 2023, has fallen 13% this year after reaching its lowest point.

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

Against this backdrop, more traditional auto manufacturers are facing pressure from shareholders to slow down capital expenditures on electric vehicles, recent examples include Porsche. Fisker, a luxury EV manufacturer, has seen market cap evaporate since last year and has since filed for bankruptcy in the United States.

"Valuation in the EV space is too high," says Soren Aandahl, founder and chief investment officer of Texas-based Blue Orca Capital. He is now avoiding shorting the industry. He says it is no longer an obvious contrarian bet, as those investments tend to perform best if investors come in "when things are slightly better." But at present, "a lot of the air has come out of the balloon."

But Eirik Hogner, deputy portfolio manager of the $2.7 billion hedge fund Clean Energy Transition, says the entire electric vehicle industry could still suffer more pain. He says there are still "too many" startups that are "too small" and with gross margins that are "too low." As a result, the supply and demand dynamics in the EV market are still "very negative."

Hogner says, "In the end, I think we need to see more bankruptcies for the market to turn around."

Edited by Jeffrey