How Hedge Funds Play GM

General MotorsGM, whose fortunes have long been tied to the American working class, is a playground for the rich when it comes to its stock.

Despite its populist renown, GM has long been controlled by institutional investors. That's never been truer than now, as hedge funds specializing in distressed securities and so-called event-driven situations pile in with an increasingly complex palette of exotic wagers that embrace its common stock, convertible securities and bonds. While GM still boasts a high number of individual investors, they operate in a wonderland of esoteric gambles that could end up deciding the automaker's fate.

There is a lot to gamble on: Questions about whether GM can avoid bankruptcy, sell GMAC, and manage to avert a strike are all behind some kind of hedge fund trade.

Much of the trading involves GM's voluminous publicly traded debt, a breed of securities that is effectively out of reach to the average individual investor. In many cases, however, these trades are either hedged or coupled with positions in the common -- and unwary investors can easily find themselves being pulled around by the tail when one of them moves.

A lot of short-selling is in place, hedge fund managers note. About 15% of the company's float represents short interest, or bets that the stock will fall -- a pretty high figure. The short-interest ratio, as measured by the amount of short sales divided by the daily volume of shares, is only 5.51%, but this relatively low figure attests to the stock's high volume more than low short selling, says a hedge fund manager. He compares those numbers with another large-cap name, PepsicoPEP , which has 1.7 billion of outstanding shares, 5.6 million of short shares and a daily volume of 4 million shares. The percentage of shorts is only 0.3% in the case of Pepsico and the short-interest ratio is 1.5%.