Baupost's Tesla Convertible Bonds Are Said to Be Bearish Wager

(Bloomberg) -- Seth Klarman’s Baupost Group acquired $200 million of Tesla Inc. convertible bonds during the second quarter in a bearish bet against the money-losing electric automaker, according to people familiar with the matter.

The Boston-based hedge fund, which initially bought $50 million of the same Tesla convertibles during the first quarter, held $250 million of the debt as of June 30, according to a regulatory filing. Tesla issued the bonds in March of last year and they carry a coupon of 2.375 percent and mature in 2022.

Tesla has three different convertible bonds outstanding, all of which rise in value when the company’s stock price increases. For the same reason, these bonds also offer short sellers a way to limit their losses when Tesla shares spike.

If a bearish bet goes awry, losses on the short position would be offset by gains in the convertible bonds. And if Tesla falls, the returns on the bearish bets could far outweigh any losses on the convertibles, according to several managers who invest in this type of debt.

“It’s like a chicken’s way to play a short,” said Geoff Dancey, a managing partner at Cutler Capital Management, an investment adviser with a specialty in convertible bonds. “If the stock does get hammered, they will do well, but if the stock goes up, they won’t take a hit.”

Tesla is the most bet-against stock in the U.S., with the number of shares borrowed for short sales totaling 33.8 million, according to data compiled by IHS Markit.

Shorting Tesla has been risky because the stock is so volatile. When Chairman Elon Musk tweeted earlier this month that the company might go private, shares soared before retreating. If Tesla were to go private at $420 a share, as Musk proposed, short sellers could see losses balloon to $4.4 billion for the year, according to S3 Partners, a financial technology and analytics firm.

While all of Tesla’s convertible bonds jumped after Musk’s tweet on going private, the biggest gains were notched by the 2022 convertibles. Partly because of their longer maturities, these particular convertibles are the most sensitive to changes in Tesla’s underlying share price.

“If you are a Tesla bull, these are the most attractive ones to own,” said James Dinsmore, a portfolio manager at the Dinsmore Group, a unit of Gabelli Funds, which specializes in convertible securities. “You get to pick up some yield and most of the equity upside.”

Baupost, which has about $31 billion in assets under management, declined to comment.

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