A TINY VIOLIN….Yesterday I read that Porsche had increased its ownership stake in VW to 74% and was seeking a “dominance” agreement that would give it control over the company. Today, via Tyler Cowen, the Financial Times reports that hedge funds are pretty unhappy about this:
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.
….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.
Technically, the complaint is that Porsche has been less than transparent about its maneuverings, and it might well be that current German regulation is too lax in this regard. That aside, though, can I just say that my heart is not exactly breaking for the hedge funds who got burned here? The whole point of most hedge funds is to invest vast sums of money with the least possible transparency possible, and now they’re complaining because somebody else has executed a slick maneuver that made what was “supposed” to be a very low-risk trade into a money loser.
Well, guess what? There’s are no tablets from Mt. Sinai that guarantee hedge funds access to low-risk-high-return investments. Their bet turned out to be a bad one, and now they’re unhappy about it. Boo hoo.
For more, check out the first commenter to Tyler’s post. He explains pretty well what happened here and how the hedge funds got burned.