Carvana's S&P 500 Inclusion and the Strategic Outperformance of Long-Biased Hedge Funds

The inclusion of Carvana Co. (CVNA) in the S&P 500 index on December 22, 2025, marked a pivotal moment for the once-struggling automotive retailer and a windfall for long-biased hedge funds that had positioned themselves ahead of the event. This strategic move by institutional investors underscores the power of index-driven momentum in turnaround plays, where early entry into undervalued stocks can generate outsized returns.

A Turnaround That Captured the S&P 500

Carvana's journey to the S&P 500 was nothing short of extraordinary. After years of financial distress, the company executed a dramatic cost-cutting strategy and debt restructuring, transforming its market capitalization from near insolvency to transforming its market capitalization from near insolvency to $87 billion by late 2025. Its inclusion in the index, announced on December 5, 2025, was driven by a 96% stock price surge in 2025 alone and a three-year total shareholder return exceeding 7,800%. Analysts noted that the move reflected Carvana's profitability and operational resilience, with 18 of 25 covering analysts recommending a "Buy" or higher.

The S&P 500 inclusion acted as a catalyst, triggering immediate institutional demand. Index funds and ETFs were compelled to purchase Carvana shares to align with the updated index composition, a phenomenon known as the "index effect." This dynamic led to a nearly 9% premarket surge in Carvana's stock price following the announcement. By December 8, 2025, the S&P 500 itself had closed at 6,875.20, reflecting broader market optimism.

Hedge Funds Capitalize on Index-Driven Momentum

Long-biased hedge funds, particularly Viking Global and Coatue Management, leveraged Carvana's turnaround and S&P 500 inclusion to generate substantial alpha. Viking Global's Andreas Halvorsen and Coatue's Philippe Laffont both accumulated large positions in Carvana during Q3 2025, purchasing 2.1 million and 2 million shares at average prices in the mid-$260s to high-$270s. By December 2025, Carvana's stock had surged to $400 per share, yielding estimated paper profits of $268 million for Viking and $272 million for Coatue-over $540 million in combined gains.

These returns far outpaced the S&P 500's performance during the same period. The index returned 8.1% in Q3 2025, while Carvana's stock delivered a 96% annualized return in 2025 and a 5,000% gain over three years. This outperformance highlights the strategic advantage of identifying undervalued turnaround plays before their inclusion in major indices, where institutional buying pressure amplifies price momentum.

Broader Implications for Index-Driven Strategies

Carvana's case aligns with broader trends in hedge fund strategies. Data from prime brokers like Goldman Sachs and JPMorgan revealed that global hedge fund leverage reached 285.2% of capital in late 2025, with multi-strategy funds pushing leverage to 645.3%. This aggressive positioning was concentrated in sectors like technology and consumer discretionary, where index-driven momentum and earnings growth created favorable risk-reward profiles.

However, the strategy is not without risks. Historical data suggests that S&P 500 inclusions often result in short-lived gains, with long-term outperformance averaging 2% to 3%. Carvana's future remains subject to challenges such as subprime auto loan growth and insider selling, which could temper its trajectory. Nonetheless, the immediate post-inclusion rally demonstrated the power of institutional demand in amplifying short-term returns for well-positioned investors.

Conclusion

Carvana's S&P 500 inclusion exemplifies how long-biased hedge funds can exploit index-driven momentum in turnaround scenarios. By identifying undervalued stocks with strong operational catalysts and timing their entries ahead of index additions, these funds generated returns that far exceeded the broader market. While the long-term sustainability of such gains remains uncertain, the strategic use of leverage and institutional buying pressure offers a compelling framework for investors seeking alpha in volatile markets.