Paul Hodgson: The long and the short of Tesla’s Martian-style corporate governance

The talk is all about short-selling – but who is long?

Elon Musk’s tweet and subsequent letter to employees about taking the company private at $420 a share certainly put the Martian among the humanoids. At the time of writing there have been 19 articles about Tesla going private on financial market site Seeking Alpha alone since the tweet.
And what is all the fuss about? Tesla’s reputation as the most shorted stock in the history of the world means that, if he does take the company out of the public arena, every short seller is going to lose even more money than they have been doing over the last couple of years
So how much is Tesla shorted? According to financial analysis firm S3 Partners, at the beginning of August, about 35.33 million shares were shorted, or 27.9% percent of its float, an even higher figure than the 2017 high, of 27%. And that’s a higher figure even than June, when it was ‘just’ 23%.
But who is shorting them? One of the biggest is Greenlight Capital LLC’s David Einhorn, who’s been shorting and haranguing Tesla for at least two years. Then there’s Jim Chanos, founder of Kynikos Associates, Anthony Bozza’s Lakewood Capital Management, and Nathaniel August’s Mangrove Partners. Lakewood lost 4% in just the first half of the year, largely because of Tesla’s rising stock price. Einhorn disclosed that his bet against Tesla also resulted in heavy losses of 18.3% during the first half of 2018. In a letter to investors that was leaked to Reuters, Einhorn said that Tesla was the driving force behind the losses and was the hedge fund’s “second biggest loser”.
Nevertheless, most analysts say that it is difficult to find a hedge fund with a significant long position in Tesla. And this is despite the fact that it is becoming more and more expensive to short the stock. S3 Partners’ Ihor Dusaniwsky noted that borrowing fees were less than 1% in October 2017, compared with almost 4% in May. This meant, he calculated, that short sellers were spending some $200,000 a day to finance shorts in October, but $1.2 million daily in May. Both those figures may have risen since then.But almost half of Tesla’s stock, basically the rest of the company’s outstanding shares if you take out Musk’s 20% holding, is held by a short list of 10 institutional investors.
Who do you think is wrong on this one?

James Anderson, Joint Manager of Scottish Mortgage Investment Trust, Baillie Gifford’s investment trust, said in a blog in November last year: “At one stage last year I was receiving at least 10 emails a week denouncing us for owning Tesla in savage words. We were told for instance, that we would be featured in ‘the mutual fund hall of shame’ as a consequence.”
Anderson, a partner at Baillie Gifford and a member of the Kay Review, was recently in the news engaging with Musk in the wake of Musk’s notorious tweet about the Thailand cave rescuer.
The trust is, after Musk, the company’s second largest shareholder, joined by Fidelity, BlackRock, Vanguard, Fifth Third Bank and T Rowe Price. Investors who have been vocal about Tesla before are not commenting on the ‘going private’ tweet, but neither are they selling.

If and when Musk takes the company private, why would any of these large holders do anything but keep their shareholdings intact? In his letter to employees, where he notes that “SpaceX is private and is far more operationally efficient”, Musk said: “First, I would like to structure this so that all shareholders have a choice. Either they can stay investors in a private Tesla or they can be bought out at $420 per share, which is a 20% premium over the stock price following our Q2 earnings call (which had already increased by 16%).”
Holders who have bought shares that short sellers have borrowed will be happy to sell at $420 and, with the confident backing of the kinds of institutional investors who are long on Tesla, it seems difficult to see any kind of a problem finding enough buyers. The only reason there aren’t more now is that short sellers are monopolising a large chunk of stock in their obsession with the company’s imminent demise.
Those short sellers will lose a lot of money paying back the loans they took out to short the stock and Musk will likely have the last laugh. Maybe he can have that annual meeting on earth, and not Mars, after all.