New York hedge fund stands to make over $5bn on Avis Budget share surge

A New York hedge fund stands to make billions of dollars on a sudden leap in the shares of Avis Budget, the once ailing rental car company that catapulted like a meme stock after executives discussed adding electric vehicles to their fleet.

SRS Investment Management, which is headed by Karthik Ramakrishna Sarma, is sitting on well over $5bn in potential gains from Tuesday’s share move, according to calculations by the Financial Times. Sarma is an alumnus of Chase Coleman’s hedge fund Tiger Global Management.

Avis’s stock initially surged by more than 200 per cent after executives told analysts on Tuesday that they were considering electric offerings. Joe Ferraro, chief executive, said the company would “be much more active” in electric vehicles.

The discussion came after rental car company Hertz last week said it ordered 100,000 Tesla Model 3 electric sedans, in what was seen as a bellwether announcement for the industry. Late on Monday, Elon Musk, Tesla chief executive, cast doubt on the deal, however.

SRS, a little-known hedge fund founded by Sarma in 2006, is Avis’ largest shareholder with a 27.7 per cent stake. That position was worth as much as about $10bn on Tuesday morning when shares in the rental car company hit a high of $545 in early trading.

In addition to the 18.4m shares it holds, SRS has exposure to another 11.3m shares through cash-settled equity swaps that are equivalent to a 16.3 per cent stake, according to filings. The fund has used prime brokers including Nomura, Jefferies and UBS on recent swap deals.

The fund first bought Avis shares in 2010 and became an activist in 2016, using aggressive purchases of swaps to build a large stake and seek representation on the company’s board. When SRS started increasing its position in January 2016, Avis’ stock price was trading at about $28.

Equity swaps allow investors to have stock exposure without owning it directly. These derivative contracts have come under scrutiny since Bill Hwang’s investment firm Archegos Capital Management made and lost billions of dollars on swaps tied to a small group of companies.

As car rental stocks plunged during the coronavirus pandemic, SRS made several purchases of Avis stock, regulatory filings show. In February 2020 the fund reached a standstill agreement that put three of its nominees on Avis’s board of directors.

Because of its board representation, the standstill agreement between SRS and Avis prevents the hedge fund from selling its shares during blackout periods, which are typically lifted shortly after earnings are released.

“SRS is subject to the company’s insider trading policy. Under the policy, trading windows are scheduled to open on the second trading day following the release of earnings,” Avis said.

SRS declined to comment when reached by phone.

Bernardo Hees, Avis chair and the former chief executive of Kraft Heinz, said in a 2020 press release: “SRS has been a valuable long-term partner to Avis. We are pleased to have reached a new co-operation agreement with them that we believe is in the best interests of the company and our shareholders.”

Hees owned almost $300m worth of shares in Avis at Tuesday’s high.

Shares in Avis had already risen more than 300 per cent this year amid investor enthusiasm about a resurgence in travel and a global shortage of new vehicles. The company on Monday reported a 96 per cent year-on-year increase in third-quarter revenues and a sharp rise in net income from $45m to $674m. Its stock ended Tuesday 108 per cent higher on the day at $357.17 per share.

While Avis executives said they were pursuing electric vehicles, the company has not announced any large orders. “We at Avis realised that the electrification of vehicles is where not just our industry, but the entire mobility ecosystem is eventually headed,” Brian Choi, chief financial officer, said on Tuesday’s call.