What: Shares of SunEdison Inc (NASDAQOTH:SUNEQ) have dropped as much as 21% in trading midday Tuesday, and its main yieldco, TerraForm Power Inc (NASDAQ:TERP), has also fallen 14%.

So what: SunEdison was once a hedge fund favorite because of its high growth and complex financial structure, using financial engineering to create value for stockholders. As long as the stock price remained high, value from projects could be created forever as more and more were dropped down to yieldcos.

But as the stock prices have fallen, it's become harder and harder for the company to grow and harder for it to finance projects as well. That's caused hedge funds to abandon the stock as the house of cards collapses around them. Here are just a few of the hedge funds that recently disclosed the sale of large positions in SunEdison.  

  • Dan Loeb's Third Point LLC liquidated its position.
  • David Einhorn's Greenlight Capital cut its position.
  • Stephen Mandel at Lone Pine Capital liquidated its position.
  • Glenview Capital Management, LLC cut its position.

Now what: The recent sell-off of SunEdison stock is partly technical due to the fact that these large shareholders were sellers in the market, which puts pressure on shares. But with the stock falling, the business model becomes harder and harder to execute because neither SunEdison nor TerraForm Power can sell shares to the market at attractive valuations to fund growth.

The challenge creates a catch-22 because the stock needs to rise for the company to generate value. With the stock trading at such a low valuation, it's uncertain whether the company can execute on growth plans, and bankruptcy is now a very real possibility. This isn't a stock I would jump into today, and if hedge funds are abandoning ship, I think you might want to as well.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.