Elon Musk has criticized investment fund managers like BlackRock for supporting short sellers, a group of investors who have been on Musk’s radar since his announcement to make Tesla private.
In a series of tweets, the CEO of Tesla and SpaceX Musk accused BlackRock of making "excessive profit" from lending shares they hold to short sellers because "they're suffering a net loss."
Short sellers are investors that borrow shares from large fund managers, sell the shares and hope that the value of the shares fall so they can buy them back to make a profit. The fund managers who lend the stock, in a process called securities lending earn a fee from the short sellers or other investors who borrow the stock.
The big funds can & will, as they’re suffering a net loss. Index managers like Blackrock pocket make excessive profit from short lending while pretending to charge low rates for “passive” index tracking.— Elon Musk (@elonmusk) October 5, 2018
Large funds grow fat on supporting short-selling
The Financial Times reported in April that BlackRock made $597 million in revenue last year from lending securities. At the same time, large funds have reduced the management fees on certain products and services as competition in the area increases.
Both Fidelity Investments and Vanguard offered no-fee trading services this year as part of a move to retain a clients base. Musk has accused the large funds saying "there is no rational basis" for long-term shareholders to engage in that business. He went on to say that the practice "dilutes the shareholder base" while giving short sellers "a strong incentive to attack the company by whatever means possible."
There is no rational basis for a long holder to lend their stock to shorts, as it dilutes the shareholder base & gives the short a strong incentive to attack the company by whatever means possible, including regulators— Elon Musk (@elonmusk) October 5, 2018
Musk also claimed that many small investors in passive index funds aren’t aware that their holdings are being lent to short sellers. The series of tweets received a huge amount of attention online.
Musk supporters question CEO's market understanding
Many have questioned Musk’s understanding of the market. Despite promising the Tesla board he would tone down his Twitter usage Musk’s rampage on the topic went as far to mock the Securities and Exchange Commission by calling it the "Short Seller Enrichment Commission" and said what short sellers do "should be illegal."
Just want to that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!— Elon Musk (@elonmusk) October 4, 2018
The comments came only days after Musk agreed to settle with the commision about tweets he sent over claims he had funding to take Tesla private. Musk agreed to step down as the Tesla chairman and also agreed to pay a $20m.
Short-sellers said they had lost millions after the tweets were sent as the price of Tesla's stock shot up. Tesla is a favored target for short sellers, thanks to its well-reported cash burn and struggle to make a profit.