Hedge funds lose more than half a billion on wrong-way bet against Tesla

Elon Musk

Tesla was the biggest short among U.S. stocks heading into its strong earnings report Wednesday evening.

Hedge fund managers lost more than half a billion dollars Thursday because of their bet against Tesla , according to estimates from financial technology firm S3 Partners.

With Tesla up 6 percent at the open of trading Thursday, investors who sold the stock short are down a collective $607 million in a single day, estimates S3.

The electric car maker led by outspoken CEO Elon Musk is the most heavily shorted U.S. stock. Short interest, or the number of shares borrowed in hopes of buying them back at a profit after the stock drops, totals $9.03 billion for Tesla, according to S3. That's $2.4 billion larger than second-place AT&T's short interest.

Source: S3 Partners Research

Tesla bears were down $3.64 billion in mark to market losses in 2016 and the first half of 2017, as the total short exposure increased 49 percent, noted Ihor Dusaniwsky, head of research at S3.

However, July and August thus far were better for the skeptics as they were able to recover more than $1.1 billion of their mark to market losses.

It's not just hedge funds that bet the wrong way on Tesla. Wall Street analysts, normally a very bullish crowd, were largely negative on the stock heading into the earnings report. They reiterated their bearishness in reports on Thursday, despite the stock pop.

"We were surprised by the after hours move in TSLA shares and continue to be cautious on the stock, especially as the risk profile shifts from the hype of the Model 3 to execution, or 'production hell' as Elon Musk refers to it," Cowen analyst Jeffrey Osborne wrote in a note.

Some of the gains Thursday may be attributed to hedge funds throwing in the towel on their short bets, forcing them to buy back the stock they had borrowed and sold short. That buying rush will sometimes fuel further gains in what's called a "short squeeze."

— With reporting by CNBC's Tae Kim .

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