Baupost’s Tesla Convertible Bonds are Said to be Bearish Wager
Hedge fund purchased $200 million in bonds in second quarter
Firm bought $50 million of same convertibles in first quarter
Excerpt
Originally published August 15, 2018 at 6:28pm EST
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 sameTesla convertibles during the first quarter, held $250 million of the debt as ofJune 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.” […]