I don’t count myself as any kind of financial expert but I do like this story of how the luxury car company snuck up on hundreds of hedge funds and simply yanked the rug from under their feet.
Porsche had previously owned 42.6% of VW stock but then through buying options on VW shares rather than the shares themselves (which would have required public disclosure) they have effectively increased their share to around 75%.
Once hedge funds realised that the State of Lower Saxony owned about 20% of the shares, leaving only around 5% of VW shares publicly available they went on a buying frenzy. Why? Because VW was the most heavily shorted stock on the German DAX, meaning they had sold shares they didn’t own and HAD to buy back the shares at whatever cost to close their positions.
On the morning of the 28th of October the VW share price had risen to over a €1000, valuing it for a brief period as the most valuable company in the world. It also inflated to the point where it was making up to a fourth of the DAX index’s movement.
Porsche have been attacked for a whole host of reasons around this trading practice and have even been accused of being more of a hedge fund than a car manufacturer, which when you realise that they made
“€3.6bn ($4.6bn) from VW options and €1bn from making cars and in 2007-08 it is likely to have made even more from its stake and derivatives in Europe’s largest carmaker.”, you might think they have a point. (FT)
The Dax have lowered VW’s percentage on the index to 10% and are investigating the practice that Options can be bought without public disclosure. German financial authorities are investigating Porsche to see whether they’ve done anything illegal and a bunch of Hedge Funds are probably licking their wounds, just trying to stay alive.