It seems like hedge funds have, to some extent, been hoist by their own petard:
Volkswagen’s shares more than doubled on Monday after Porsche moved to cement its control of Europe’s biggest and hedge funds, rushing to cover short positions, were forced to buy stock from a shrinking pool of shares in free float.I wish understood how these derivative thingies worked but they haven't half caught harry hedge fund on the hop:
VW shares rose 147 per cent after Porsche unexpectedly disclosed that through the use of derivatives it had increased its stake in VW from 35 to 74.1 per cent, sparking outcry among investors, analysts and corporate governance experts.
I may not understand derivatives but I do no that if only 5.8% of a company's shares are in free float and:
Porsche revealed on Sunday that it held 31.5 per cent in derivatives in VW., Germany’s financial regulator, recently ruled that companies were not obliged to disclose such positions where the derivatives were settled into cash rather than shares.
But the sudden disclosure meant there was a free float of only 5.8 per cent – the state of Lower Saxony owns 20.1 per cent – sparking panic among hedge funds. Many had bet on VW’s share price falling and the rise on Monday led to estimated losses among them of €10bn-€15bn ($12.5bn-$18.8bn).
“This was supposed to be a very low-risk trade and it’s a nuclear bomb which has gone off in people’s faces,” said one hedge fund manager.
As of last Thursday, according to consultancy Data Explorers, 12.9 per cent of VW’s shares were on loan for investors to go short and bet on them falling – the highest percentage of any German company.Somebody, somewhere, is going to make an awful lot of money out of harry hedge fund.
Still, as one of them was saying on the BBC's Bottom Line radio program a few weeks ago, these are grown up investors using grown up people's money. I would still like to be on the conference call when they explain this loss though.