VW's 348% Two-Day Gain Is Pain for Hedge Funds

[question everything]

OCTOBER 29, 2008

VW's 348% Two-Day Gain Is Pain for Hedge Funds
By GREGORY ZUCKERMAN, JENNY STRASBURG and MIKE ESTERL
WSJ

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 ($1,185) in trading in Frankfurt after fellow German car maker 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 rushed to pay ever-higher prices for shares they need to exit from positions. 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 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 so-called cash-settled options to potentially acquire another 31.5% of VW, which could 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.

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http://online.wsj.com/article/SB122521969404976819.html (subscription)

[Hannah Bell]

1. greenspan:

http://investing.businessweek.com/businessweek/research/stocks/people/person.asp?personId=23970022&symbol=VOWG.DE