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Thursday 30 October 2008
VW and Hedge Funds
The damage from the head-on collision between many scores of hedge funds (and maybe some banks) is yet to become fully apparent. Some early estimates suggested that the losses from the “short squeeze” could be as much as €30 billion ($37.4 billion),
Volkswagen’s turbocharged shares cause misery for hedge funds
It is hard to feel sorrow for hedge funds. Their reputation as ruthless investors and the largely unwarranted blame for amassing huge sums of cash as the financial system crumbled have earned them unflattering comparisons to locusts, spivs and far worse. But if there were ever a moment when the hedge funds might be deserving of a modicum of pity it may be now. On Tuesday October 28th Volkswagen’s share price briefly made it the most valuable company in the world, at a time when many hedge funds had placed substantial bets that the German car company’s value would shrink.
The damage from the head-on collision between many scores of hedge funds (and maybe some banks) is yet to become fully apparent. Some early estimates suggested that the losses from the “short squeeze” could be as much as €30 billion ($37.4 billion), although the final tally will probably be many billions less. Ironically, given that some hedge-fund managers live up to their popular brash and conspicuously wealthy image, the other car company involved in the pile-up is Porsche.
The trouble started on Sunday, a day not traditionally associated with financial disclosure. Porsche has long wanted to take its more staid counterpart under its wing. And as part of the process, it quietly revealed that it had raised its stake in VW from 35% to 42.6% and had amassed cash-settled call options that would raise its holding to 74.1%. But hedge funds had reckoned that VW, like other car companies buffeted by financial uncertainty and looming recession, would suffer. Many had taken short positions in VW’s seemingly overvalued shares hoping to profit from a slide. So the revelation that Porsche had acquired a much bigger stake was dreadful news.
Aside from Porsche, the state of Lower Saxony has a 20% stake in VW, leaving just under 6% of the firm’s shares floating freely. Given that 12% of VW’s shares had been lended out for short selling this left hedge funds in an appalling bind. As soon as markets opened on Monday hedge funds began panic buying in a seller’s market to cover their positions. The rapidly ascending share price sent losses on short positions soaring and forced others who were hoping to weather the storm to start buying too. By Tuesday the clamour for the small pool of traded shares sent the price for a short time to €1,005, making VW briefly more valuable than ExxonMobil, although by the end of the day’s trading the shares had retreated to €920.
Whatever their affinity with the firm’s products, hedge-fund managers blamed Porsche for their travails. Porsche, in turn, stuck with the explanation that it had abided by stock market rules that would have required notification if it had bought a direct stake but did not insist on such transparency over the accumulation of cash-settled call options. The car firm went further in a statement on Wednesday saying that it “denies all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves.” But Porsche said that it would ease the situation by settling hedging transactions of up to 5% of its VW shares to avoid “further market distortions”. And by lunchtime VW’s shares had plunged to around €500, although this still represents a vast premium over Friday’s closing price of €211.
After a car wreck first the bodies are counted then blame is apportioned. Hedge funds are so far keeping tight-lipped about any involvement, let alone losses. German and American investment banks saw their shares suffer amid rumours of their exposure. Perhaps the main culprit is the fog of German financial regulations, which allows clandestine stake building using derivatives without the need for disclosure. And next time a hedge-fund manager roars past in his Porsche try to understand the conflicting emotions he must feel grasping the wheel of a physical manifestation of his recent nemesis.
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VW and Hedge Funds
Squeezing the accelerator
From Economist.com
29 October 2008
Volkswagen’s turbocharged shares cause misery for hedge funds
It is hard to feel sorrow for hedge funds. Their reputation as ruthless investors and the largely unwarranted blame for amassing huge sums of cash as the financial system crumbled have earned them unflattering comparisons to locusts, spivs and far worse. But if there were ever a moment when the hedge funds might be deserving of a modicum of pity it may be now. On Tuesday October 28th Volkswagen’s share price briefly made it the most valuable company in the world, at a time when many hedge funds had placed substantial bets that the German car company’s value would shrink.
The damage from the head-on collision between many scores of hedge funds (and maybe some banks) is yet to become fully apparent. Some early estimates suggested that the losses from the “short squeeze” could be as much as €30 billion ($37.4 billion), although the final tally will probably be many billions less. Ironically, given that some hedge-fund managers live up to their popular brash and conspicuously wealthy image, the other car company involved in the pile-up is Porsche.
The trouble started on Sunday, a day not traditionally associated with financial disclosure. Porsche has long wanted to take its more staid counterpart under its wing. And as part of the process, it quietly revealed that it had raised its stake in VW from 35% to 42.6% and had amassed cash-settled call options that would raise its holding to 74.1%. But hedge funds had reckoned that VW, like other car companies buffeted by financial uncertainty and looming recession, would suffer. Many had taken short positions in VW’s seemingly overvalued shares hoping to profit from a slide. So the revelation that Porsche had acquired a much bigger stake was dreadful news.
Aside from Porsche, the state of Lower Saxony has a 20% stake in VW, leaving just under 6% of the firm’s shares floating freely. Given that 12% of VW’s shares had been lended out for short selling this left hedge funds in an appalling bind. As soon as markets opened on Monday hedge funds began panic buying in a seller’s market to cover their positions. The rapidly ascending share price sent losses on short positions soaring and forced others who were hoping to weather the storm to start buying too. By Tuesday the clamour for the small pool of traded shares sent the price for a short time to €1,005, making VW briefly more valuable than ExxonMobil, although by the end of the day’s trading the shares had retreated to €920.
Whatever their affinity with the firm’s products, hedge-fund managers blamed Porsche for their travails. Porsche, in turn, stuck with the explanation that it had abided by stock market rules that would have required notification if it had bought a direct stake but did not insist on such transparency over the accumulation of cash-settled call options. The car firm went further in a statement on Wednesday saying that it “denies all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves.” But Porsche said that it would ease the situation by settling hedging transactions of up to 5% of its VW shares to avoid “further market distortions”. And by lunchtime VW’s shares had plunged to around €500, although this still represents a vast premium over Friday’s closing price of €211.
After a car wreck first the bodies are counted then blame is apportioned. Hedge funds are so far keeping tight-lipped about any involvement, let alone losses. German and American investment banks saw their shares suffer amid rumours of their exposure. Perhaps the main culprit is the fog of German financial regulations, which allows clandestine stake building using derivatives without the need for disclosure. And next time a hedge-fund manager roars past in his Porsche try to understand the conflicting emotions he must feel grasping the wheel of a physical manifestation of his recent nemesis.
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