The idea of a hedge-fund manager being run over by a Porsche is enough to make us laugh our heads off.
The idea of a hedge-fund manager being run over by a Porsche is enough to make most of us laugh our heads off. And yet this has just happened to a whole bunch of them! This strange affair is no fairy-tale, even though it comes out of Germany, and it goes like this.
Porsche, the maker of fast four-wheel toys for hedgies, has wanted for many years to buy Volkswagen, its much much larger big brother. The fact is Porsche was beginning to look more like a hedge-fund itself than a car manufacturer: in its accounts for the year ended 31 July 2007, it made €1 billion from cars and €3.6 billion from options trading, so buying VW would make it look like a car manufacturer again, and Germans just love car-makers.
So Porsche began quietly buying VW shares three years ago and sneaked up to a 42.6% stake, leaving a 57.4% float on the market. Then, when the downturn arrived, shorting car-makers shares became a fast one-way bet for hedgies, and over a hundred of them borrowed 13% of VW’s shares to do just that, namely selling stock they didn’t own so as to buy it back at a lower price and pocket the difference.
So far so good, but then Porsche decided to take a leaf out of the hedgies' book and secretly acquired a further 32% of VW, not by buying shares in the transparent open market, but by buying non-transparent derivatives called CFDs – Contracts for Difference – which no one could see or know what was happening. (Under UK market rules a stake of over 1% acquired in this way must be disclosed, but not so in Germany.)
On Sunday 26 October 2008, when the markets were closed for business, Porsche chose to announce quietly to an unsuspecting world that it now had 74% of VW. The word ‘PANIC’ is inadequate to describe what happened on Monday: the hedgies charged for the exit quicker than you could drive a Porsche round Berkeley Square on two wheels, as they raced to close their positions by buying stock they had previously sold.
Their next problem was that the free float of VW shares available on the market was only just over 5%, so VW’s shares rocketed up, much to Porsche’s great pleasure, so that VW was for a short time the single most valuable company in the world! As I said, it’s enough to make you laugh your head off, the fact that a hundred hedgies have lost £24 billion by crashing their Porsches.
Here’s your chance to blog back: do you think the hedgies got their come-uppance?
“We vehemently deny reject the accusation of share price manipulation.” – Porsche.
“We make money from hedging and building cars. The difference is that hedge funds don’t make cars the last time I checked.” – Porsche Spokesman.
“I have hedge fund managers literally in tears on the phone.” – Car Analyst.
“Hedge funds are locusts.” – German Politician.
“It is the worst investment in the history of financial markets.” – Fund Manager.
“This thing will leave no winners.” – Really? What about Porsche?