A secret move by Porsche to ramp up its stake in Volkswagen yesterday has caught some big hedge funds with their trousers down – and even briefly made Volkswagen the world’s biggest company (with a market value of nearly €300bn). Several were left desperately trying to cover short positions after betting that the share price would go down – and with hardly any free shares available to trade, the price went soaring and the hedgies were left nursing losses of more than $10bn. And somehow, we can’t imagine they’ll get a whole lot of sympathy.
The hedgies have ended up in the mire because they’ve been shorting VW shares – using borrowed stock to bet that the share price would fall. But when Porsche said that it had upped its stake from 35% to 74.1% (by buying derivatives), they were left with a serious problem. Since the state of Lower Saxony owns about 20% of VW, it meant that only 6% of the total stock was available to trade – and since the shorts accounted for about 13%, the result was a mad scramble that pushed the share price from around €200 to (briefly) over €1000, before easing back in later trading.
This was all very nice for Volkswagen, which briefly overtook Exxon-Mobil as the world’s biggest company by market value, and Porsche, which saw its shares soar in value. But it was rotten news for the shorters, who were left sitting on losses of about €10-€15bn in the space of one day. ‘I have hedge fund managers literally in tears on the phone,’ one London-based auto analyst told the FT. We reckon we’d be crying too after that…
Naturally, some of them are also crying foul: there have already been complaints that Porsche shouldn’t have been allowed to build up such a big controlling stake without being obliged to tell anyone (German law doesn’t require positions to be disclosed if they’re done by buying derivatives in cash). The resulting lack of transparency, they suggest, creates a situation that’s highly embarrassing for European markets.
Now you might think this smacks of special pleading. And there’s also a certain irony in hedge funds complaining about a lack of transparency, given this isn’t exactly a defining characteristic of the industry. Indeed, many people have been blaming short-selling hedge funds for creating much of the recent stock market volatility, so we can’t imagine there’ll be much sympathy if some of them get hoist by their own petard.
In fact, of all the institutions in the world likely to get a sympathetic hearing at this juncture, hedge funds would probably be near the bottom of the list. Even the occasionally straight-laced Germans at Porsche are likely to be hiding a smile this morning...
In today's bulletin:
Crunch costs us $2.8trn - so far
BP records forecast-busting £10bn profits
MT's Little Ray of Sunshine: Porsche gives hedgies a hiding
Why the Lehman restructuring could take a decade
But we are cool, insist accountants