How Hedge Funds Play GM

The bearish bets against GM's common stock reflect its declining fortunes and, to some degree, expectations that the company might one day face insolvency. GM has repeatedly distanced itself from such speculation, and has moved in recent months to cut employees, factories and benefits to conserve cash. Last month, GM halved its dividend and welcomed Jerome York, an adviser to major shareholder Kirk Kerkorian, to its board. Despite these actions, GM's credit has been downgraded further into junk territory and the sentiment remains bearish. The stock is down 43% over the last year.

"A lot of hedge funds assume that General Motors is going to be recapitalized," says Roy Ophir, a principal at hedge fund Brownstone Asset Management. A recapitalization is manna for distressed players, because their bonds often get restructured into equity on favorable terms.

General Motors' board is meeting Monday and reports have indicated it could agree to a sale of GMAC then. While bondholders should reap an immediate benefit, there's less agreement about the long-term impact on shareholders. One hedge fund manager believes a sale of GMAC is a net negative for owners, because it deprives GM of one of its last big sources of revenue.