Avis shares erase 600% short squeeze gains as hedge fund rally unwinds

Shares in Avis Budget Group have lost all of their 600% surge from a short squeeze earlier this year, ending a turbulent period that resulted in significant losses for bearish investors and prompted a legal dispute with hedge fund Pentwater Capital Management, according to Bloomberg. The rental car company's stock plummeted as much as 3.5% to $99.20 on Monday, reverting to levels observed prior to a sharp rally in March that briefly elevated the stock above $700.

The squeeze commenced after Pentwater disclosed a substantial increase in its Avis stake, igniting a buying frenzy as short sellers hurried to cover their positions. At the time, over half of Avis's available shares were sold short, intensifying the rally. The turnaround happened following Pentwater's announcement of selling 4.3 million shares, causing the stock to recoup 70% of its gains in just two trading sessions.

Subsequently, Avis accused the hedge fund of exacerbating the volatility, to which Pentwater agreed to pay a $650 million settlement to resolve litigation over short-swing profits. The stock's ongoing decline reflects the challenging conditions facing the rental car industry, including inflation, higher interest rates, dwindling international travel demand, and disappointing earnings, which are negatively impacting valuations.

Short interest in Avis has since diminished to 29% of its public float, a stark contrast to its March peak, according to S3 Partners. Rival Hertz continues to be a primary target for bearish investors, with 81% of its float sold short. Vikram Rai of First New York, who profited significantly from Avis during the squeeze, now no longer holds a position.

This development underscores the perils of concentrated short positions and the rapid unwinding of speculative rallies once buying pressure dissipates.