(Adds Elon Musk's tweets)
By Svea Herbst-Bayliss
BOSTON, July 31 (Reuters) - Billionaire hedge fund manager David Einhorn told investors on Tuesday that a sharp rally in Tesla Inc shares, which he bet against, turned into heavy second-quarter losses at his Greenlight Capital fund, and stuck by his dim outlook for the electric carmaker.
Greenlight lost 18.3 percent in the first six months of 2018, Einhorn wrote in a letter to investors seen by Reuters. Tesla shares, which rose 29 percent in the last quarter, was the fund's "second biggest loser" during that period, he added.
Hours after sending the letter, Einhorn notified investors that the fund's returns fell again in July. After a dip of 0.4 percent this month, the fund is down 18.6 percent for the year, an investor told Reuters.
Tesla's Model S residual values are falling, Einhorn wrote, noting he has been frustrated by power windows and touch screen problems in his own Model S sedan and got rid of the vehicle as his lease ended.
The company's more affordable Model 3 got modest reviews and bad publicity, which Einhorn said was "probably having a negative impact on the brand." He said he doubted the car could be "produced profitably anytime soon, if ever" and criticized the company's plan to rush cars to customers.
He called Tesla Chief Executive Elon Musk "erratic and desperate," after Musk said an analyst asked a "boring boneheaded question" during the company's last quarterly earnings call.
"Tragic," Elon Musk tweeted bit.ly/2n2vveR as he responded to Einhorn's comments.
"Will send Einhorn a box of short shorts to comfort him through this difficult time," Musk tweeted early Wednesday.
Musk regularly takes to Twitter to criticize people with opposing views and has seen a backlash from investors for his comments. Earlier this month, he apologized to British caver Vern Unsworth after making insulting comments that pushed Tesla shares down.
Einhorn, along with fellow hedge fund manager Jim Chanos, is one of the electric carmaker's fiercest critics, accusing it of putting "dangerous products" on the road and saying it was burning through cash.
Despite Einhorn's steady complaints, Tesla's stock price has raced ahead, turning his own short bet into a wreck that rivals say he should have trimmed.
His own investors have complained about Einhorn's stubbornness and criticized his unwillingness to say how much he has lost on the bet and come up with specific ideas to improve the portfolio's long-running underperformance.
Einhorn acknowledged mistakes and said the fund's returns over the past three years have been "far worse than we could have imagined." He also said several investors have run out of patience and asked for their money back. A filing from the end of March showed Greenlight had assets of roughly $4 billion.
"Right now the market is telling us we are wrong, wrong, wrong about nearly everything," he wrote. However, he added that he still liked his market position. "Looking forward from today we think this portfolio makes a lot of sense," he said.
He said he had tried to stem the losses. "We have taken action to mitigate our problems," Einhorn wrote, explaining that he covered most of the firm's Netflix Inc short position between January and April at $281.46 and used more put options in the short book.
He said he exited a bet on Japanese bank Resona Holdings , sold retailer Dillard's at a loss and covered a five-year bet against Elekta AB with a small gain.
The fund also took a new bet on Altice Europe.
Reporting by Svea Herbst-Bayliss; Additional reporting by Shubham Kalia in Bengaluru; Editing by Richard Chang and David Gregorio