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Hedge funds and VW: what a pile up!

Robert Peston | 08:46 UK time, Wednesday, 29 October 2008

If ever there were a country and a people that signalled their distaste for hedge funds, private equity and the self-defined alternative investment industry, that country and people were Germany and the Germans.

A VW TiguanIt was this famous quote of April 2005 to the German popular newspaper, Bild, by the then Deputy Chancellor of Germany, Franz Munterfering, that didn't exactly represent a "come-in-and-make-yourself-comfortable" message to the rocket scientists of financial services:

"Some financial investors spare no thought for the people whose jobs they destroy. They remain anonymous, have no face, fall like a plague of locusts over our companies, devour everything, then fly on to the next one."

There will be some pathologists of the economic mess we're in who'll argue that Munterfering was spot on. But we can have that debate tomorrow or the next day.

Today let's ponder the marvel of the €22bn (£18bn) loss incurred over just two days by hedge funds and other short-sellers of shares in Volkswagen AG.

We know there is a loss of that magnitude, because the aggregated short positions in VW - or the sum of all those bets on a fall in VW's share price - have been equivalent to 11% of the business at a time when the shares have been soaring.

In fact on Monday and Tuesday, VW shares rose an extraordinary 348% - which is enough to burn to a frazzle anyone wagering that the stock would decline - after Porsche disclosed it had taken out financial contracts that would give it a controlling stake in VW.

Shares in a company tend to rise, when a corporate bidder arrives on the scene. But in this case the increment was way beyond normal human experience: at one point yesterday VW became the most valuable company in the world, worth more even than Exxon.

You may ask why VW's shares have risen quite so much in so short a time. And the explanation is that there are very few of its shares available to trade, as the German state of Lower Saxony controls more than 20% of VW stock with voting rights.

When the share price started to rise, those who had bet on it falling had to scramble to buy, to cover their short positions and limit their losses (they had borrowed shares, and had to buy them so as to be able to repay these loans).

Which hedge funds have been wounded, possibly mortally?

Not, in spite of widespread press reports to the contrary, Marshall Wace of the UK.

It has incurred a tiny loss on VW, of just €5m, and the value of its core fund is up a tiny bit on the month.

So the hunt is on.

Those in the somewhat stressed hedge fund world say those most likely to have been seriously burnt are the so-called quant funds that try to replicate the performance of stock-market indices by buying and selling a few representative shares - because they are more likely than others to have taken out short positions in a mechanistic way, unmitigated by human judgement ("computer says yes").

Inevitably some traders and investors are calling foul.

They're furious with Porsche - because the astonishing surge in VW's share price was precipitated after the maker of the City traders' favourite vroom-vroom disclosed on Sunday that it had acquired financial contracts (cash-settled options) to buy more than 30% of VW.

If it exercises those options, it would have almost 75% of VW.

What annoys the hedgies is that they feel Porsche has been less than clear about its intentions towards VW - since in March Porsche said that the probability it would take its stake in VW to 75% was "very small indeed".

Some of the hedgies are therefore complaining to the German regulator, BaFin.

Which, in view of German attitudes to hedge funds, may represent the supreme triumph of hope over experience - and a slightly surreal postscript to the years of super-boom for debt-fuelled investment.

UPDATE, 09:38AM: More mayhem in the shares of German car makers this morning. VW's price fell as much as 56% at one stage, while Porsche's rose by more than a third. And Daimler's climbed by a fifth.

Why the rollercoaster?

Well Porsche said it would be helping out the squeezed hedge funds by settling "hedge transactions in the amount of up to 5% of the Volkswagen ordinary shares" - which has the effect of releasing 5% of VW's stock on to the market for trading.

But it added that it was still "committed" to raising its stake in VW to 75% - and would buy VW shares at prices that were "economically justifiable".

Does Porsche's decision to offer respite to the hedgies amount to an admission that it had somehow behaved improperly in the way it released information about its intentions towards VW?

No hint of that.

Porsche said allegations of price manipulation by it were "without any foundation" and that it denied "all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves."

And, with that, it pressed down on the accelerator and vroomed off.

Comments

Page 1 of 3

  • Comment number 1.

    So the short sellers got caught with their trousers down. That's the way the cookie crumbles.

  • Comment number 2.

    Ha ha ha!!! IN YOUR FACE Hedgies !!!!

    Strike one for the good guys!

  • Comment number 3.

    I hope this is another sector of the financial 'services' that is mortaly wounded by their greed

    Crying all the way to the bank, whoops sorry, Bankruptcy courts hopefully

  • Comment number 4.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 5.

    How my heart bleeds

  • Comment number 6.

    So the hedge funds are going to complain to the German regulator because the share price realistically represents the value of the VW company. And Porche have changed their position on purchasing the VW shares since the hedge funds drove down the price to make that change of attitude possible.


    Much as I realise that hedge funds think the share price should be nothing more than an arbitrary number, similar to 26 red on a roulette wheel, it is difficult not to read this blog without a very broad grin across the face.

    If they have "Bollinger bands" at the top of their graphs, perhaps it would be prudent to draw "tap water" bands across the bottom.

    ROTFLMAO

  • Comment number 7.

    When will shorting be banned? How can one sell something one does not own, nor take possession of if bought? Rooseveldt got it right in the 30s by prohibiting shorting

  • Comment number 8.

    A drop in the ocean.

  • Comment number 9.

    How did we all cope before Hedge Funds?!

    Back at home, Gordon Brown seems to have stopped concentrating on the economy from when he wakes until when he sleeps and has decided to wade into the debate about Russell Brand and Jonathan Ross.

    The show was on over a week ago. 400 000 people listened. 2 complaints for swearing were received.

    The media stirs up public interest. 10 000 people complain... None of whom listened to the show, I would guess, or they would have complained earlier.

    None of the people who chose to listen to the show complained about the content.

    Gordon Brown is so keen to deflect attention from his management of the economy he's decided to jump on this passing bandwagon.

    Pathetic. He needs to focus.

    The show was funny, by the way. Everyone lighten up!

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 11.

    I'm sorry I can barely stop laughing.
    It couldn't have happened to a nicer bunch of chaps.

    If you live by the sword you can die by the sword.

    I read the story yesterday when it broke and was amused greatly. Oh to have been a fly on the wall in some of the hedge fund offices when the disaster dawned on them.

    I imagine there are a few bank and insurance executives thinking et tu Brute this morning.

  • Comment number 12.

    I cannot get too excited about this VW issue because it is basically a zero sum game. What one guy wins another guy loses.

    What are not zero sum, though, are the bonuses these hedge fund managers will have paid themselves over the last few years.

    If they get wiped out it will be the pension funds and investors who are left holding the losses. The hedge fund managers will just retire to the caribbean with their wealth.

    This is true across the board. People ask where has all the money gone; the answer is in the pockets of the bankers and hedge fund managers.

  • Comment number 13.

    The true irony, of course, is that the toys these traders will be throwing from their prams will invariable be Porsches.
    (snigger)

  • Comment number 14.

    In view of the current extraordinary market conditions, why shouldn't Porsche change its mind?

    Hedge Funds are the epitome of what can be wrong with the financial services industry. They do not create wealth - their aim is to skim as much as possible off the top of what is created by others. Stock and commodity markets should exist to enable real investment, bona-fide insurance etc. In fact, they are largely engaged in speculation (gambling) and other parasitical activities. Yet again these activities are having a devastating effect upon the lives of many millions of people.

    This time there must be root and branch reform. Financial "services" should play a much much smaller part in the economies of the future.

  • Comment number 15.

    Who cares if hedge funds lost £18bn. The money has not vanished. If hedge funds lost £18bn then real investors gained £18bn which is GREAT news.

  • Comment number 16.

    The hedges have been trimmed! (not in German this time!)

    Ho Ho Ho ;-)

    with a little schadenfreude

  • Comment number 17.

    I was in Germany in 2006 for a week visiting a giant machine manufacturing plant. The manual workers had dignity and the products were superb.

    I lament Britains decline. We have been fooling ourselves for a decade about the value of our Financial Services industry. The King is clearly naked but still paying himself a bonus for bet dressed monarch.

    All the decent jobs in the UK have been scoured away for two generations.

    RP made the point last month that the government was crowing about building a UK industry to supply the government if that is not an Ouroboros what is?

    I do not think that we have it in our national character to rebuild from this one. We have become a nation of washed up debt druggies formerly addicted to the illusion of celebrity high living.

  • Comment number 18.

    GOOD!

    A salutary lesson to the hedge funds.

    May they all go the same way.

  • Comment number 19.

    Wait for it, the taxpayer will have to bail them out.

  • Comment number 20.

    Ha ha! It goes to show that shares can go up as well as go down! LOL

  • Comment number 21.

    The Germans have a word for it - Schaudenfreuda.

    My worry is that the hedge funds (which may include our rescued banks, by the way) will ask the taxpayer to bail them out and worse still some politician will agree to do so.

  • Comment number 22.

    OK a few billion quid wipes out or hurts these people and they hopefully will lose their houses and assets.

    But RP lets keep the agenda going

    What about these updated home loan figures?

    1. Are they new loans
    2. Are they remortgages
    3. Are the downsizers

    This is important in terms of any recovery because if they are not new then nothing has changed

  • Comment number 23.

    Maybe not a flight to quality, but a flight away from total rubbish.

    What makes me laugh is watching the NEWS channels.
    CNBC with it’s sound effects Boom’s Whoosh’s etc all to make it feel like we’re in some action movie the BBC will be doing it next with Peston absailing in to give us the latest update.
    SKY NEWS morning market open from the city with the reporter lurching around, as the market opens asking is it up or down.
    News papers showing a photo of a trader with a big smile on his face following a day of rising stock prices and the next day head held in his hands following a day of losses.

    It’ll totally hysterical! Some funny things do come out of the Credit Crunch.

    Some Thoughts.

    The impact of high Taxation.

    Property prices have been pushed higher not only by easy loans but also by the Tax’s on the purchases.

    Bear me out here….

    Buyers have either subconsciously of consciously added the cost of Stamp Duty of their new property to the sale price of the property they are selling. “ So pumping up the price” everyone did this.

    Stamp Duty has been a big factor in forcing property prices higher.
    This maybe counter intuitive.

    The same it true of many other decisions we make the fact is we all consider how much tax will we pay and how much will be left after we’ve paid it.

    The net effect is that we increase our prices and our charges to make up for the cost of the taxes.

    This drives the bubble.

    With low taxation the economy would be more stable this may appear to be too simplistic a view, but as with the Stamp Duty example above subconsciously or consciously we all try to compensate.

    Government borrowing has been out of control the worry is that it is set to get even bigger. The goal should be to reduce it to nil.
    But that will never happen so we will see more bubbles.

    HOT AIR Stock market Values

    Why would anyone be surprised to see share prices fall 50% or more?
    Most have only had 10%-20% asset value the rest is HOT AIR or expected future profits, goodwill an expectation of good things like dividends.

    Strip those things away and it is amazing that share prices are as high as they are today!

    The equity market could easily fall to 20% of it’s 2007 average.

    So where has all the money gone well “ it was never there in the first place “ it was just HOT AIR or unrealised profit.

    Where does that leave us investors well my guess is a return to fundamentals of
    Energy
    Housing
    Food

    ENERGY
    Renewable “where it makes financial sense Rare!”
    Nuclear “difficult to invest as a private investor construction etc”
    Gas “only through shares, difficult to invest in”
    Oil “only through stocks” and for the next few years unlikely to see much higher prices due to aver supply.

    HOUSING
    High housing prices will return with a vengeance buyers will need to take some pain over the next 18-24 months the thing with property it that the cost of carry still works through rentals but now more than ever location will be the key.
    Be carefull if you are considering investing in bombed out house builders as thy are quite likely to be taken over for pennies when they are worth pounds, the vultures will make sure of that.
    Better to invest in buy to let.

    FOOD
    Buy a Farm or farmland for the long term.
    Invest in food co’s that have direct supply chains.
    Supermarkets exposure to land and non-food will prove only to drag them down.

    GOLD

    Well it’s not worth anything to anyone except as jewellery or for flashy teeth.
    Only if they find gold has some industrial benefit will it be worth investing in.
    The era of using Gold to trade with has well and truly gone.

    But who knows.

  • Comment number 24.

    You language is spot on: these were "bets" and just that. The stock market was intended as a mechanism to provide investment to businesses. Anyone who just takes a short leveraged position is just gambling and not providing any meaningful investment - so let 'em burn!

    Furthermore, where did the €22bn go? To those who bet on VW shares going up. It is pretty much a zero-sum game. It is not like they had a big bonfire of Euros!

    Like any gambler, the hedge funds should not bet more than they can afford to loose. If they do, then they make their own bed and lie on it. The fact that they are crying to the regulator just shows that they are an arrogant bunch who seem to think they have some divine right to big profits and bonuses!

  • Comment number 25.

    FINALLY!

    Now that my faith in God is renewed, can we replicate the same effect another 1000 times till all of those locusts are out of business for good and have to flog ther Ferrari's?

    And they have the audacity to complain that Porsche did not tell them in advance of their plans? sure, and they should have laid the red capret as well!

    Go the Germans! Well done. And thank you.

  • Comment number 26.


    I hope they do take it to the German finance regulators. The Germans are already talking about prosecuting bankers
    and I'm sure the state attorney will have a lot of sympathy for UK/US hedge funds that tried to force down the value of government investments in Volkswagen. When they messed with VW the hedge funds took on the German government and bit off a bit more than they could chew.

    Schadenfreude.

  • Comment number 27.

    I imagine there is one or two city traders whose plans to buy a Carrera GT with their Christmas bonus have fallen short!

  • Comment number 28.

    Please excuse me for being dull. The HF people did not actually 'Borrow' the shares did they? I thought they made a contract to sell some at some time in the future (at a lower value?).

    Could anyone put me right on this, please?

  • Comment number 29.

    Good, these hedge funds can cause a company to fail, now they know how it feels

    Happy Christmas

  • Comment number 30.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 31.

    It is hard not to be satisfied at the thought of a few of these locusts losing everything but I guess you can bet your bottom dollar we, in the wider economy will pay for this debacle. If the funds go down with big debts they will leave creditors, quite possibly the pension funds they borrowed the shares from, unpaid.

    I suppose that suitably expunged of thier debts the greedy individuals who have again caused so much harm will be back in the market within a year, betting with our money.

  • Comment number 32.

    This whole practice of trading "promises" is whats bringing countries to their knees.....

    Perhaps as has been already stated the whole area of short trading and futures should be consigned to history.....its just a set of wealthy people gambling with other peoples lives .
    The Nat Rothschilds of this world wouldnt be missed....They create nothing,employ few people and just make a few friends rich, while destroying companies,jobs and lives.....for fun.





  • Comment number 33.

    You may note the absolute lack of any sympathy whatsoever here. I can't possibly guess what the reason is for this....

    Could it be that the public don't actually like all of those uber-high powered brokers and fund managers who have made such a killing from crashing the share prices of our banks through short-selling? Could it be that people don't actually like these people making billions at our expense, leaving the UK tax-payer (of which I am, thankfully, not one...) to pick up the bill?

    I think I might just crack open a bottle of champers at lunch today to celebrate them finally getting a semblance of a come-uppance for their greedy exploitation of the markets.

  • Comment number 34.

    We are in the middle of a giant economic mess and there is still short selling, and hedge funds and stock markets going up and down. When is someone in power going to realise that the system is seriously flawed and do something about it. I am tired of hearing about how and why it happened with nobody suggesting how it can be prevented from happening again, and doing something about it-NOW!

  • Comment number 35.

    The comments below say more about the people writing them than the issue.

    If the German Government is concerned about the rights of its investors and companies to operate and invest in an un-manipulated manner, then it should not permit Porsche to create a false market in Volkswagen shares. That does no-one any favours.

    It is clear that in today's economic environment the VW share price should not be exhibiting this volatility and performance. The ramifications of Porsche's strategy are now far beyond it managing to reduce the effective cost of taking over VW - with impacts on 'normal' investors (I exclude hedge funds from comment as the term appears to over excite too many on here), index-linked funds, etc.

  • Comment number 36.

    Now there's an interesting sport. Hunting Hedge funds.

  • Comment number 37.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 38.

    1. there is a serious point to be made: We are all suffering due to market failure. Markets fail due to information asymmetry- I know things you don't. VW/Porsche used derivatives to (potentially) transfer control without disclosing the transaction in a timely manner. As a result losses were incurred by various investors including hedge funds. If this type of "secret" trading occurs, markets will not be efficient and all of us will lose.

    2. To those who are expressing joy at the losses: Whose money do you think hedge funds are investing? It's probably a portion of your pension, or your insurance company.

    3. Finally, when will Robert Peston and the BBC stop lumping Hedge funds with Private equity? They are totally different - I got so mad about this I wrote a book on the subject: https://www.icaew.com/index.cfm/route/160216/icaew_ga/en/Technical_Business_Topics/Thought_leadership/Private_equity_demystified_An_explanatory_guide

  • Comment number 39.

    The shorterr sellers are now even shorterr ,even Black Beard had his day, lol!

    The hedge funds hang about the London financial markets the way way pirates used to hang about the coves of Cornwall

  • Comment number 40.

    Shares drop at record levels. Robert Preston writes scare-mongering blog about how the city is in trouble. Shares rise at record levels Robert Preston writes scaremongering blog about how the city is in trouble.

    Can I have a job at the BBC too please?

  • Comment number 41.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 42.

    As my father-in-law would say, "there is a God, after all".

    In the midst of the doom and gloom, we get a little something to bring a smile to the face. A little sign that those who play fast and loose do get caught out now and again. And wow, their trousers must be on fire...

    Just a pity I didn't dump my B&B shares a week before they became toilet paper and switched them to VW.... ah, I can dream!

  • Comment number 43.

    They sold shares at a high price that they didn't own in order to make a quick gain hoping the price would fall.

    When the price rises they have to buy the shares to settle their sales they have to pay more and make a massive loss.

    Serves them right!

  • Comment number 44.

    So.. The pound is up, the FTSE's up, mortgage lending's up, interest rates are falling, inflation's falling and some hedge funds have taken a bit of a kicking - HAPPY DAYS!! :-)

  • Comment number 45.

    I am not sure I really understand the comments here.

    Hedge funds run your pensions. Your pensions have lost out €18bn which has been transfered to Porsche. You could have actually bought a Porsche instead. Now you have lost part of your pension instead. Hey ho.

    Hedge fund managers do not have much of their own money in the funds. Your money ladies and gentlement, your money.

    And a lot of the losses will be from index trackers and from banks trying to hedge against other products.

    And lets say a bank goes under and it needs to be bailed out by Gordon when he can drag himself away from messers Brand and Ross. He bails it out with your money. Yes ladies and gents, your money.

    And lets just question what the value of Volkswagen is? is it €250bn? the largest company in the world? I can see lots of people rushing out to buy cars when they are losing their jobs or they cannot get credit.

    Can we get away from this national obsession with a culture of hatred and envy and just focu on Jonathan Ross a bit more?

  • Comment number 46.

    Robert, I'm not sure if you think this is bad news, or you have your tongue firmly tucked in your cheek.

    Frankly, I've only stopped laughing long enough to write this very short comment.

  • Comment number 47.

    So what about the costa del crash ?

    How about the Banks exposed to billions of subprime Spanish loans ?

    Hey that would be Gov't favourite Santander, aka Abbey, aka B and B , aka Alliance and leicester.

    Talk about having all ones bad eggs in one basket!

  • Comment number 48.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 49.

    #35

    If a company has to declare it's position then shouldn't hedge funds - but then that would undermine how hedges work - in other words what is good for the goose is good for the gander...

    PS, were you one of those wiped out in your gambling or have you been at the nutty fruit-cake too?

  • Comment number 50.

    I've really enjoyed this story - the idea of VW briefly becoming worth more than XOM as hedge funds scrambled to pay 1000 euros to buy back stock they'd shorted at 200 euros is some welcome light relief at a time of widespread economic gloom. You couldn't make it up, could you? I've always been against short selling, and think a ban might be considered - but this is a far more effective deterrent.

    One thing I don't understand, though, is where these short sellers actually borrowed the shares from - can anyone explain this? If Porsche owns 74% and the regional government 20%, how is it that there were enough shares available to be borrowed?

    Be that as it may, this story will surely contribute to more prudent and conservative investor behaviour.

    One other thought; if dealers earn bonuses by making profits for their employers, which is fair enough, does this work in reverse in a case like this, and can investment houses claw back some of the losses made by the idiots who thought it a smart move to short VW? Negative bonuses would be a really interesting twist to the story............

  • Comment number 51.

    Dear oh dear, where to start.. There is so much misplaced gloating here it's hard to decide..

  • Comment number 52.

    This story also raises an interesting side-issue - the market in Porsche and other high-performance sports cars.

    Back in the 87 crash, the price of used 911s (and similar) dropped to rock-bottom levels as City types sold in panic, and many enthusiasts got bargains; is the price of used sports cars falling now?

    Perhaps the price of a used 911 might be a useful barometer of the financial system?

  • Comment number 53.

    There's nothing wrong with short sellers. Laugh and snigger all you like, but point the finger elsewhere.

    Here's why:

    Have they been working above and beyond the law? No, not that I've heard. So, if we don't like their methods, we should be blaming the REGULATORS for allowing it, not the short sellers who are working wthin the law.

    Next, we need to stop and think (rather than just snigger because they have lossed lots of money and we haven't). Think, and then post a comment.

    RP says: "they had borrowed shares, and had to buy them so as to be able to repay these loans". Question: who lends short sellers all of these share? Fund Managers (someone correct me if I'm wrong). What funds? Our managed pension funds maybe?

    So the people are who are managing our funds are lending out (our) shares, which in the normal course of short selling are devalued. They then take back these devalued assets into their portfolios and add the their cut for lending out the shares to their own bottom line (not to OUR funds).

    Please, someone in the know tell me if I'm wrong.

    So who should we be blaming? The regulators or the fund managers (who are supposed to be looking after us but are merely lining their own pockets). Take your pick.

  • Comment number 54.

    Oh dear. Oh dear. Oh dear.

    Where Oh dear = 6Bil. Can't win them all.

  • Comment number 55.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 56.

    #38 rjmghome

    1) If you are proposing that someone at Porsche bet against the hedge funds by betting that VW shares would go up, then this is insider dealing, and I bet it is illegal in Germany as most places.

    What more likely happened is Porsche merely took advantage of VW depressed share price to pick up a bargain. There is nothing wrong with that!

    2) People rejoice because those who make ridiculous bets, as opposed to rational investments, will be driven from the market because they cannot afford to take the losses that they are making.

    It may be "our" money, and it may result in short term losses for our pension and insurance funds, but it is better in the long term to have stable markets that give realistic returns.

  • Comment number 57.

    #19 + #21

    Whilst I'm in agreement with the sentiment here of "they got what they deserved" I also can't help wondering if this will create another bail out situation.

    Also, let's not forget, it is highly possible that pension funds will have been using hedge funds or as part of their investment model and if that is the case then those pension funds will be damaged as well.

    Some would argue the hedge funds getting a kicking is good news but I don't think it's as simple as that.


    I could be wrong.

  • Comment number 58.


    #9

    Could not agree more - another demonstration of the power of the media to manipulate the public into faux outrage over nothing.

    At least it stopped them talking down the housing market some more......and fortuitously prevented them from reporting the actual drop of only 8% (based on completed house sales, year on year) as opposed to the usual speculation of 2-3 times that amount that is now the prevalent belief amongst the public at large, thanks to the media.

    Anybody want to buy some houses bye the way - I have a large and enviable selection!?

  • Comment number 59.

    #45

    "Hedge funds run your pensions. Your pensions have lost out €18bn"

    Isn't that the point, Hedge funds and more importantly their managers, gamble with other people money which is why any sane, morel, thinking person sees them as bad and uncontrolled - one (bad) decision by a HF manager can wipe out someone else's future, be that a pension fund or a trading company that is forced into bankruptcy.

    It seem to me that pension funds have swapped the Maxwell's of the world for something very similar in hedge funds...

  • Comment number 60.

    Hedge-funds and shortsellers crying about Porsche beating them with their own weapons? Laughable.

    More annoying, index driven fonds crying about VW boosting the Dax?

    Hey, what happened with Porsche, VW and the shortsellers happens every day at any stockmarket. Ok, at a far lesser scale ands normaly with the opposite winner.

    But have you ever heard any crying, when a profitable company was bought by hedgies, scliced in several cuts, sold piece by piece, pumping the debt in the last remaining part that the went bancrupt?

    Do you think, any of the shortsellers would cry a tear for the ordinary shareholder of VW, if their bet had worked out and VW lost worth?

    Do you think any index fond would cry, if VW would have lost through the hedgies manipulation?

    Yesterday they cried about the need to buy VW at such a high rate, because they had to mirror the index, do you hear anything from them today, as the othe 29 members of the Dax 30 have a big comeback?

    It is true, in a normal world, all this betting, shortselling, speculation, simply would be forbidden, but as long as it is not, brokers are the last people I want to hear crying, if for once a big company was not torn down by them, but showed them a big, big middle finger.

  • Comment number 61.

    Damn, who are these Hedge Funds so I can take out a short position on their shares. I'm on a winner.

  • Comment number 62.

    #50

    Wasn't Porsche buying as the hedges were selling....

  • Comment number 63.

    Thank you, thank you, thank you Porsche!

    Ok, so I'm no better off and no worse off than I was when I woke this morning but
    I've laughed so hard, I'm crying.

  • Comment number 64.

    @ 50

    Where the shortsellers where able to lend 12 % of VW stocks, as only 6 % are available on free market is a question, that is asked from many now.

    I think you have to consider, that Porsche does not own 74% of VW yet, but only about 43 and have options for another 31.

    So, if you are a Bank, holding VW shares, give Porsche an option, meaning to to sell them these shares, let's say, next spring, why shouldn`t these bank lend these shares for a few days to a shortseller?

  • Comment number 65.

    I'm not sure this blog really reflects the position accurately. Maybe I'm missing something, but let me explain how I see the VW share price issue.

    Porsche has not actually bought any more shares in VW. Rather they have taken out options to buy about 30% of VW. They have not disclosed the strike price of the options (ie the price they'll pay to acquire the stock when they exercise the options).

    For every option over which Porsche has an option, someone must have an equal and opposite written option position, ie an agreement to sell Porsche a VW share at the strike price. Although we don't know the strike price, I'd be pretty confident it isn't 300% higher than the price on the day(s) Porsche bought the options, ie the strike price won't reflect the big rises in VW's price over the past couple of days. There may be some premium over the market price on the day(s) concerned, but not much, given that the extreme price movements in VW only started after Porsche announced its intention to increase its stake in VW to 75%. So the announcement was the trigger, not any abnormal activity in the derivatives market.

    The question is, would knowledge of Porsche's intention have had an impact on the cost of VW shares, and therefore on the options Porsche took out? Given what happened after the announcement, I think we can conclude it would have had an impact on the VW share price/options cost. However, at the time of entering into the options trades, only one party knew of Porsche's intentions, and that was Porsche itself.

    If this is a fair reflection of how the trading took place, then I think there can be very little doubt that it will be in breach of the Market Abuse Directive.

    Finally, a word on who gains from these trades. There is only one winner, and that's Porsche. They have options to buy shares at X per share, where X is almost certainly a much lower price than the current market price. On the other side are various current holders of VW shares who have taken the opposite side of the options trades, and will therefore have to sell shares at a price much lower than the current market. If 11% of the shares were shorted and has caused losses of EUR 22 billion, and Porsche has options to buy about 30% of the company, then existing holders of 20% of VW have suffered opportunity losses of about EUR 40 billion.

    Whilst Hedge Funds may or may not deserve sympathy, I think the existing holders of VW stock (representing the 20% discussed above), many of whom may have been long term investors, probably do deserve some thought. Given that many are probably large German pension schemes and banks (German banks still have significant holdings in major German companies), I suspect Porsche isn't goping to get a sympathetic hearing from any element of the German state, including BaFin, the regulator.

  • Comment number 66.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 67.

    Shorting should be illegal - it encourages and prays on decline, the fall in banking shares wouldn't have been so bad without these parasites.

    They deserve this and I hope a lot of them fail....maybe somone should short the Hedge Fund Company stocks and profit from the demise of the hedge fund...see how they like it.

  • Comment number 68.

    I remember the 80's VW advert which said "This is the man who bet a million on black when it came up red ... This is the man who moved into the smart money just as the smart money moved out"

    coming up : "these are the hedge funds who sold short when the market went long"??

  • Comment number 69.

    38:

    Check the rules of the German stock exchange, they are not the same as the London one. Actually most European ones operate in a completely different principle. They are different in protection of minority shareholders and also on first to inform. There are also rules on indicative shareholding announcements.

    Remember the arrest warrants against Marks and Spancer France execs?

  • Comment number 70.

    Amen Boilerplated

  • Comment number 71.

    #45. At 10:17am on 29 Oct 2008, fattybadger wrote:
    I am not sure I really understand the comments here.

    Hedge funds run your pensions. Your pensions have lost out ?18bn which has been transfered to Porsche. You could have actually bought a Porsche instead. Now you have lost part of your pension instead. Hey ho........


    So you are trying to tell us that the Funds in charge of boosting our pension funds were SHORTING VW?



  • Comment number 72.

    It's schadenfreud all round for the hedge funds. And a brilliant coup for the German model of capitalism.

    Hedge funds have done more to destabilise the global financial system than anyone else. They rank as more dangerous even than the toxic debt of derivatives.

    They are responsible for record fuel and food price inflation, runs on banks, destabilising currencies and bankrupting nations.

    They run off with their loot leaving taxpayers to foot the bill for a ruined banking system, or the IMF to bail out bankrupt countries.

    One hedge fund manager boasted in July 2006, "I want to be known as the man who bankrupted Iceland."

    Well he's got his wish now he can pay for it.

    The IMF should require hedge funds, not the taxpayer to provide the money for the bailouts that countries like Iceland need at present.

    This will prevent the moral hazard of hedge funds behaving recklessly and bearing no cost or responsibility for their actions. They have undermined the very basis of our prosperity as a capitalist society and run off leaving ruined economies and the taxpayer to pick up the bill.

    The future of hedge funds and financial derivatives will be top of the agenda for the forthcoming Bretton Woods II.

    Our favourite bank manager, Captain Mainwaring will be in the chair, in spirit at least!

    Just the man to deal with all that toxic waste.
    Chelyabinsk




  • Comment number 73.


    "GERMAN CAR-MAKER PORSCHE REVEALS THE WORLD'S MOST EFFECTIVE HEDGE-TRIMMER"

  • Comment number 74.

    Well done Porsche !Looks like the hedge has been clipped rather short!

  • Comment number 75.

    This is the best news I have heard in weeks.

    I really do hope that the people who have caused so much misery and harm by their behaviour have now been caused some misery themselves.

    Hopefully the alleged 'regulation' of markets/banks etc that Brown and others are talkng about will deal with these people. I will wait and see.

  • Comment number 76.

    Good for the Germans. They like the French are keen to protect their industry. Unlike the UK, where the likes of Slater Walker and Hanson asset stripped British industry until it had been destroyed.

  • Comment number 77.

    Fattybadger - my comments are well justified and well understood.

    Firstly, the type of hedge funds that are under the kosh here are Quant Funds, those that supposedly follow the fortunes of only a select few Companies on a particular exchange believing that there are higher earnings to be made focussing on individuals rather than tracking the market as a whole. Quant funds usually attract more professional investors than pension funds as they tend to be higher risk. Pension funds traditionally hold their funds invested in banks and other blue-stock chips and don't involve themselves in short-selling due to the inherent risks associated with it, as has been highlighted above.

    Secondly, I don't keep ANY of my money in a pension fund. I invest my capital in property. At 22 I feel that this is the sensible option. I am currently looking to release over £100k of equity on a property at the moment so that I can purchase another property, and as I have a very cordial relationship with my mortgage provider this should not prove to be a problem. £100k equity release at the age of 22 - I'd love to see the pension fund that could match this.

    Thirdly, as I said, thankfully I am not a UK tax-payer. I don't like people wasting my tax monies so as far as I'm concerned Gordon Brown can do whatever the hell he wants. If that means buggering up the future of the UK economy by leveraging the Government to Hell and back, so be it. It's not on my shoulders and it's not with my money.

    I love seeing this type of thing unfold, as the people that are losing out are NOT the general public, they are professional investors and the like. If the World has any justice, this will cause the odd broker to lose their job and financial security.

    But most of all, it's not happening to me.

    The joy of schadenfreude.

  • Comment number 78.

    Laugh?

    I nearly disgraced myself :) Agree 100% with post 9 btw. Surely GB has enough on his plate at the moment, indeed perhaps J Ross should have a plug back at the PM.

  • Comment number 79.

    There are a few suggestions on here that if the hedge funds lose money then it is our pensions funds that are the ultimate losers as they are among the investors in the hedge funds. However the hedge funds have presumably borrowed the shares from other pension funds in the first place, and the latter will now be better off as the share price has risen. So on average won't our pension funds be unaffected?

    Anyway, as #53 implies, the best solution may be to ban pension funds (especially passive, tracker funds?) from lending out stock. Then perhaps the whole shorting industry would just disappear.

  • Comment number 80.

    If VW yesterday at 1000 Euro / stock had a worth of about 300 billion Euros, and Porsche today sold the promised 5% "to help out the shortsellers" at, let`s say 600, they made about 9 billion cash today.

    And if the fixed price for their 35% options is around 200 Euro, they'll buy almost halve of them with this 9 billions. In other words: for nothing.

  • Comment number 81.

    This is great news. I could buy a VW and tell people that I drive a Porche!

  • Comment number 82.

    This looks like a clear case of naked shorting to me - since the hedge funds were scrabbling around to find available shares after Porsche upped the stakes, it's fairly obvious that the funds had shorted the shares without ensuring that there were shares available in the first place.

    It is widely believed that the Lehman Brothers collapse was exacerbated by this practice - for more information on the phenomenon, Patrick Byrne (CEO of internet seller Overstock.com) has a very informative site at https://www.deepcapture.com/

    There may be some Italian-American gentlemen choking on their meatballs this morning.

  • Comment number 83.

    A few have made good points on here about who is loaning the stock for the hedgies to short.

    This then poses the question of, apart from the fees gained for manipulating stock that doesnt belong to them, what the institution owning these loaned shares actually has to gain by allowing this kind of insidious behaviour to take place with assets owned by them, on behalf of, as has been said loudly enough "our pensions".

    Could it be that the fund managers are taking much longer positions on these shares and as a result see that an organisation like VW is, over the long term more likely to prove more profitable than not? Or, do they not give a stuff, so long as they get their cut? Are they behaving unethically?

    On reflection, maybe those who got burned by HBOS & B+B also had the same thoughts originally. Look where that got them...

    You should only gamble what you can afford to lose. Even a schoolkid knows that.

    Oh and by the way, those grumbling about "your pensions, ladies and gents, your pensions"... do you think that many of us, thanks to Gordon and Geoffrey Robinsons pillaging 10 years ago have got any pensions worth the paper they are printed on anyway?

    Finally, some of you may remember that there has been a long history and quite a degree of synergy between these two companies... IIRC, a couple of years ago, didnt VW step in to stop Porsche being bought out by venture capitalists? Or was it the other way around?

    Eitherway, its about time the hedgies got a timely reminder that values go up as well as down. :-) Maybe they wont play quite so fast and loose next time.

  • Comment number 84.

    fatty @ 45

    Hedge funds run your pensions

    No, they don't - what they mainly do is manage vast sums of money on behalf of High Net Worth Individuals.

    That's the idle rich to you and me.

  • Comment number 85.

    # 53

    I cannot speak for all investment funds. However, I have had responsibility for running lending programs in a number of large funds. I can state categorically that none of the lending fees went into our bottom line. All lending earnings net of the program's costs went into the fund for the benefit of investors. Do I think some investment managers take a cut of earnings for themselves? Yes I do. Can you do anything about it? Yes. If you are in a defined benefit pension scheme, ask one of your Member Trustees for the scheme's lending policy and details of how lending revenue is shared. You probably won't get the actual percentage splits (tend to be covered by non-disclosure terms), but you should get confirmation that the fund manager can't take a cut. If you have defined contribution pensions and/or ISAs invested in unit trusts/OEICs, ask the manager of the Funds you're invested in for details of their lending policy and who gets what out of the fees. Switch Funds if you don't like the policy, and assuming you have the choice in your DC pension.

  • Comment number 86.

    Haaahahaha! Hahaha! Ha Ha!

    That is all.

  • Comment number 87.

    Robert

    The FSA are assembling a group of external advisers (crisis team) to deal with the UK insurers.

    One of the options being considered is to relax rules on accounting and capital requirements! Words fail me. Surely strengthening the capital base is the only show in town.

    If this work is beyond the capability of the FSA, does it not beg the question: Are the FSA fit for purpose?

    You could not make it up!

  • Comment number 88.

    KAIZEN in the factory ...

    SZUN TSU in the takeover bid of VW ...


    = Management by PORSCHE


    (a nice German guy)


  • Comment number 89.

    forbid short... go back to investing!

  • Comment number 90.

    #45... would love to agree, but actually vanishingly little of our pensions is in hedge funds' hedge funds are mainly an ego vehicle for the manager, where people who think they're good at trading can swing the bat with someone else's money for a bit. If it works, they make millions off the "two and twenty" system (2% of initial investment plus 20% of all profits go to the manager) and can retire happily; if it doesn't, they can either go and work for another fund and try it again (maybe changing plusses to minuses...) or go back to a mainstream financial job with the record of having been a "hedge fund manager".

    The losses are to wealthy individuals and risk-taking money managers who invest in these funds. But they knew the risks.

    More of a concern is more traditional and risk-averse institutions whose investments in the German equity markets (DAX, for example) have been buffetted by the ludicrous swings in that index's value. Anyone, for instance, who took a short position in the DAX to hedge some general European equity exposure will have been severely burnt through this rather dubious behaviour by Porsche. I hope it doesn't push any traditional and non-vulturous managers over the edge.

  • Comment number 91.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 92.

    Just like most ordinary folk I have no sympathy for those hedge funds who lost money on their bet that VW shares would go down and it was good to learn that on this occassion these smartarses have been outsmarted. It's all well and good banging on about how greedy and reckless our bankers have behaved but the same also applies to these hedge fund managers.

    It also raises the question should the stock exchange operate as a gambling casino where people bet, by the hour, on which way shares in certain company's will fluctuate. Perhaps at this moment in time it would be useful to remind everyone working there that this institution was originally set up to help businesses to raise capital for future long term expansion based on sound business experience and expertise.

    If we are to progress from being a debt ridden nation, living on borrowed money from overseas, to one that can pay its way in the world , then perhaps the people working in this institution should concentrate their efforts a little more on what is good for the UK economy overall and a little less on making a quick buck for themselves

  • Comment number 93.

    "This is great news. I could buy a VW and tell people that I drive a Porche!"

    My Skoda is even better value for money now.

    Did they change the name of the 911 in America? It is like having the Rover Lockerbie.

  • Comment number 94.

    re 17.
    I have highlighted many times the fact that as a nation we are obsessed by having something for nothing and that has been the root cause of all this problem but also wanting more and more in the way profits whether it is personal gain or corporate gain and now paying a very high price for not being self sufficient in areas we once excelled.
    All those skills handed down for generations have been lost just because we all wanted cheaper and cheaper goods.
    We cannot sustain continuous growth its absurd, the planet cannot survive. The latest reports are telling us that by 2030, which is not far off we will need two planets just to sustain the current lifestyle not any further expansion. What were you doing in 1986, if you want to think how close we are to disaster?
    That means each and everyone of us is guilty unless you are reading this living as a hermit!!!
    but we have another British disease and that is self depracating Why I have absolutely no idea. The media seems to have instilled it in our culture for reasons best known to themselves, whereas other Countries have a pride, not only in themselves but the work they do, the Country they live in. They want the World to see them in the best possible light- not us it would seem, we just moan about everything, criticise each other when we often know very little about the work someone does and have no pride in looking after the environment we all inherited.
    We need to bring back personal & social responsibility as well as commonsense, pride in the work people do, not continuous battering by the media for this sector or that sector. We have a fantastic health service, with people who we should all be immensly grateful to, who do an amazing job day after day. One which many of us could not stomach for one day and its free. People should live in other Countries where they have to pay before they begin to criticise our wonderful NHS. We have teachers who day after day work in often very challenging environments, firemen, police, people who work in factories, people who work in shops, all contributing to our own lives and yet for some strange and bizzarre reason we hold up pathetic 'celebs' as role models. We even have to watch them congratulating themselves when they have already been more than obscenely rewarded for doing very little.
    There is no such thing as Eutopia anywhere in the World but you could be living in many places far worse than here!!
    We need a sea change of attitude in the UK and we need it right now.
    We all need to accept that if our children and grandchildren are going to have any life at all we are the ones who have an enormous responsibility that we don't destroy their futures.
    This financial fiasco may well be the wake up call the World needs and if it doesn't respond why worry about the financial markets, it will be of no importance to any of us

  • Comment number 95.

    Hmm - mine and your pension fund has lost £18 million that has passed to one of the richest families in Germany - no wonder all the posts on here are of such a celebratory nature.

  • Comment number 96.

    #81

    "This is great news. I could buy a VW and tell people that I drive a Porche!"

    In the same way that people buy a Skoda and tell people they drive a VW? Except that in the case of Skoda it's true!...

  • Comment number 97.

    Let me see if I've got this right. Porsche buys options on 30% of VW stock at an undisclosed strike price. The owners of some shares decide, in the meantime, to earn a slightly higher return by lending shares to short sellers; they'll get the shares back and sell them to Porsche at the agreed price. The short sellers think they can sell, buy back lower, make a profit, and return the shares to the owners. So far so good.

    This raises a number of questions. Should Porsche have declared its purchase of options? I don't know what the rules are here, but I'd guess not.

    Should the lenders have told the borrowers, "I think you should know that these shares are under option to Porsche"? Again, probably no reason why they should disclose this, indeed it was probably confidential, market-sensitive information.

    It seems to me that we're left with the conclusion that neither Porsche nor the share lenders did anything wrong.

    The hedge funds thought they knew better than the market, i.e. that VW's share price would fall.

    But hang on a minute - wasn't it a well-publicised probability that Porsche was going to buy VW? I seem to recall that the German authorities actually announced a change in their rules specifically intended to make this takeover possible. Any autos analyst could, presumably, have predicted that VW was going to be acquired by Porsche.

    So, bottom line, the short sellers were short of brains and short of knowledge as well as short of stock. Shame.

    Meanwhile, the winners here seem to be Porsche. Porsche is a respected industrial company, maunfacturing good products, employing thousands of skilled workers, and contributing to the economy. In my book, that makes them the good guys, and its nice when the good guys win.

    Short sellers have made lots of money in the past by right calls. This time the call was wrong (actually, pretty stupid) and they lost. Seem fine to me..........

  • Comment number 98.

    There's me thinking that "to edge" is to protect yourself against large swings in the share price.

    If these edge funds are losing money at a time when they are suppose to be the most stable then those running them should be sacked.

    Thing is we all know someone them found out that they can make easy money by shorting while paying people to sit on share forums to spread rumour and talk down shares.

  • Comment number 99.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 100.

    When are you going to cover the story that Larry Elliott of the Guardian si calling the UK economy -
    'Mutton dressed as lamb'?

    Sterling has fallen further than during the ERM crisis as imternational investors dumpt the currency.

    The VW story should be covered form one simple angle: Porsche would be breaking the law if the did what they did in the UK... whay are they being allowed to aget away with it? What is the purpose of the EU?

 

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