Hedge funds lose £12.6bn on bad VW bets

Wednesday, 29 October 2008 11:28

Hedge funds are set to face billions of pounds of losses after bets on the falling price of Volkswagen turned massively against them.

Hedge funds expecting the price of VW to fall – amid the coming recession depressing car sales – were caught out when Porsche announced it had secretly bought options to take a 75 per cent stake in the firm, something it had previously denied.

The move saw the share price rise and hedge funds were forced to scramble to buy stock in the carmaker to stem their losses pushing the price up further and at one point making VW the world’s most valuable firm.

The market capitalisation of VW hit ?296 billion (£232 billion).

On Monday the VW share price rose 147 per cent to ?520 (£407) and yesterday it was up to ?1,005. This compares with a Friday closing price of ?210.85.

With Porsche taking so much of VW – and the German state of Saxony owning 20 per cent – there were few shares around for hedger funds to get their hands on.

It is estimated losses on the short-selling will amount to £12.6 billion – although it is unclear which funds were hit and how many will be forced to go to the wall.

Media reports often describe short selling as betting on the price of a stock going down – and the upshot of going short is pretty much that, although it is a little more complex.

If a trader thinks a stock is overpriced they can choose to go short.

When going short, a trader is selling a stock he doesn’t own but is promising to deliver it later. So he borrows a stock at a certain price and sells it. When the price falls, he buys it back at the lower price and returns the share.

In the case of VW, the price of the share did not fall, but rose meaning the hedge funds had to buy shares at a loss to honour their contract.

Germany has had a long-held animosity towards hedge funds.

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