Massive short covering at VW and massive losses for hedgies

I ran across a very disturbing news item today that is getting a lot of press in Germany. Apparently, the leveraged finance community is getting routed at the German Automaker VW. The crux of the situation is that Porsche, which controls VW, upped its stake in the company causing shares to rise.

For whatever reason, a number of hedge funds were actually short VW – meaning they were betting against the shares. A short squeeze ensued and the shares rose a massive 50% – making VW the world’s largest company – at least temporarily.

The result: losses in excess of 20 billion euros. And I have heard that the rise in VW alone made the DAX (Germany’s equivalent of the Dow Jones Industrial Average) rise 7%. Truly amazing.

Volkswagen briefly became the world’s largest company by market capitalisation on Tuesday as panic-buying by hedge funds desperate to cover losses caused its value to shoot up by up to €150bn.

Shares in Europe’s largest carmaker soared as high as €1,005 in early trading, having closed at about €210 on Friday. That gave it a market capitalisation of around €296bn ($369bn), higher than that of ExxonMobil, the oil company that closed on Monday with a value of $343bn……

“I have hedge fund managers literally in tears on the phone,” said one London-based auto analyst. Hedge funds had bet that VW’s share price would fall but after Porsche disclosed it held 74 per cent of the carmaker rather than the previously assumed 35 per cent there was a huge scramble to cover positions.

Analysts and investors said some hedge fund failures were likely because of the size of the losses, which reached about €20bn-€30bn on Tuesday. They also called for a full investigation by Bafin, Germany’s financial regulator, into whether there was market manipulation.
Financial Times

See the video at the FT article.

I still think much of the recent market turmoil – especially in currencies – has a lot to do with forced selling by hedge funds. These hedge fund managers on the phone crying deserve zero sympathy.

I am a fan of short sellers and the transparency they bring to the market. But, these leveraged players were simply playing with fire and they got burnt.

This is further reason we need to regulate these funds.

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.