Against the backdrop of accumulated market inertia, this story describes what can happen;
VW's 348% Two-Day Gain Is Pain for Hedge Funds
By GREGORY ZUCKERMAN, JENNY STRASBURG and MIKE ESTERL
Hedge funds around the world absorbed a punishing blow Tuesday, as soaring shares in Germany's Volkswagen AG created one of the biggest losses from a single bet in recent memory.
The funds are expected to face billions of dollars in losses, according to prime brokers familiar with the positions, because they were wagering that VW shares would fall. Instead, shares of the big German auto maker soared 82% Tuesday to €945 ($1.19 billion) in trading in Frankfurt after fellow German carmaker Porsche Automobil Holding SE said it had boosted its VW stake.
VW shares are up 348% over the past two days and 267% in the past month -- as short sellers must pay ever-higher prices for shares they need to cover positions.
[Volkswagen]
Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside Capital, according to people familiar with the funds.
In short squeezes, investors who borrowed and sold stock expecting its value to fall must exit from the trades by buying those shares, or "covering" their positions. That can send a stock upward if shares are hard to come by. When shares are scarce, that can push a company's market capitalization well beyond a reasonable valuation.
The remarkable trading had an impact across the German market. Investors trying to beat market indexes were forced to chase VW shares or risk falling behind. On Monday, VW's surge was so powerful it pulled the German DAX index into positive territory, ending 0.9% higher, even though shares of the other 29 companies in the index fell.
Indeed, the recent stock gains left Volkswagen's market value at about $346 billion, just below that of the world's largest publicly traded corporation, Exxon Mobil Corp. Late Tuesday, stock market Deutsche Börse AG said it would cap Volkswagen's weighting in the DAX index at 10% as of next Monday. After Tuesday's surge, Volkswagen's weighting in the DAX had soared to 27%, up from 6.8% at last Friday's close.
With VW shares pushing astronomical levels, some hedge funds are calling foul. They are accusing Porsche, already a 42.6% VW holder, of misleading them about its intent to gain full control of VW.
On Sunday, Porsche disclosed it held 31.5% of so-called cash-settle options, enough to potentially give it a near-75% stake in the German auto giant. Many funds had been focused on Porsche's previous statements, which they say suggested Porsche would not make such a move.
The panic buying was in part because the Porsche announcement suggested there were relatively few shares freely traded in the market, since the German state of Lower Saxony controls slightly more than 20% of the voting rights.
The high valuations had recently encouraged big hedge funds to bet against Volkswagen shares, reckoning that they would return to a more normal valuation. Porsche's disclosure only squeezed them further, however, and, because some were using borrowed money to make the trades, the losses were compounded. Even worse, many had also bet that Porsche's shares would increase. Yet Porsche shares have fallen almost 43% over the past month.
Some of these firms say they are writing letters to regulators or are considering doing so, asking that Porsche's actions be examined. Tuesday, BaFin, the German securities regulator, said it was examining the matter but that no formal investigation had been launched.
Porsche has sent mixed signals to investors. In September, it said, "Our goal continues to be to increase our stake in Volkswagen to more than 50%." But earlier this month, Chief Executive Wendelin Wiedeking said at the Paris Auto Show that Porsche also wanted to keep open the "purely theoretical option" of a 75% stake in Volkswagen, even as it apparently did its buying. Last March, Porsche denied reports that it intended to increase its Volkswagen stake to 75%, saying the probability "is very small indeed."
"The biggest problem is that Porsche appears to control over 70% of Volkswagen and didn't have to disclose that fact," a move that would have to be disclosed in most developed markets, says Max Warburton, an analyst at Bernstein Research. "Under German law they don't have to disclose what they're doing, but earlier this year they put out press releases denying speculation that they would build" their Volkswagen stake to these levels.
A Volkswagen spokesman declined to comment on the stock movement or on Porsche's strategy. A Porsche spokesman rejected allegations of share-price manipulation, adding that investors betting on Volkswagen's share price are responsible for the stock's extreme volatility. The Volkswagen trading is sparking calls inside and outside Germany to tighten disclosure rules and boost transparency.
Although investors in Germany must disclose when they accumulate a stake of as little as 3% in a public company, they aren't required to report certain options that track a stock's movements but don't give a holder an underlying vote.
Shares of Morgan Stanley, Goldman Sachs Group Inc. and some other big financial companies tumbled in morning trading on fear that they too lost money on Volkswagen. But a Morgan Stanley representative said the firm has "virtually no exposure" to Volkswagen, and the stock rallied later in the day. Both Morgan and Goldman shares closed up Tuesday as part of the broader U.S. stock-market rally.
—Christoph Rauwald and Edward Taylor contributed to this article.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com, Jenny Strasburg at jenny.strasburg@wsj.com and Mike Esterl at mike.esterl@wsj.com |
