Hedge Fund Losses in VW Exceed the Cost of Marshall Plan

How much did hedge funds lose shorting Volkswagen (VLKAY-NYSE) in a pair trade with Porsche? Initial estimates ranged as high as $30 billion, but it depends where they covered.

The number ultimately could rival the monies spent to reconstruct Europe after World War II. That does not adjust for inflation, of course, but makes for good copy. Will it mark the high water mark in the war against hedge funds? Perhaps, but it appears that proprietary trading desks at banks were bigger losers.

In any case, it continues to keep tongues wagging, as another issue emerges...how will Porsche pay the taxes on their outsized profits?

Hedge funds were heading for a full-blown row with the German Government last night as it emerged that funds sitting on tens of billions of euro losses after short-selling Volkswagen could go bankrupt.

Porsche, VW's biggest shareholder, stands to pocket a quick €6billion (£4.7billion) profit from the short-selling. Times Online

I need to check my math, but I am pretty sure that number only includes the realized gains after Porsche bled out some stock in the name of liquidity. But Hedgistan is up in arms, although they are receiving scant sympathy:

The London-based Alternative Investment Management Association (Aima), the hedge fund trade body, said yesterday that it planned to ask the European Union to clamp down on a controversial German legal loophole that allowed Porsche secretly to take its VW stake to almost 75 per cent.

Andrew Baker, Aima deputy chief executive, said: “This sounds somewhat irregular. If you tried that in this country, there would be a number of questions to be answered.”

He said losses for hedge funds were likely to be less than a tenth of the forecast €20billion. “There are funds hanging on by their fingertips because of redemptions for whom this could be the last straw,” he said.

The casualty list of hedge funds hit by the Porsche squeeze on VW grew yesterday as it emerged that Steven Cohen’s SAC Capital and Och Ziff, and Perry Capital, a key financier in Malcolm Glazer’s takeover of Manchester United, were among the losers. Greenlight Capital, run by David Eindhorn, Marshall Wace, York Capital and Glenview Capital are also among about a hundred hedge funds thought to have made losses. Times Online

Fans of the stunt might want to be careful what they wish for...this was “short term greedy” and wil cause some problems longer term:

One senior London-based hedge fund manager said: “This was just old style-cornering. Nothing like this has happened in Britain since the railway scams of the 1890s and it gives Germany a Wild West feel. If you did that here, you would never be able to trade with banks again,” he added.

Look for more VW stock to hit the market as Porsche raises money to pay the tax bill. But Porsche’s profit on the “corner” exceeds their market cap...remarkable.

And money managers missed important clues earlier in October, shortly before the shit hit the fan, as Porsche subtly telegraphed their intentions:

“Our task now, together with our colleague Martin Winterkorn (VW chief executive), is to create added value and attack Toyota.”

Nobody spotted the subtext: That it was now pointless to speculate that endless management infighting could delay the merger. NY POST

Money managers normally read the tea leaves and act accordingly, but missed the cues in the chaos of the past month.

Ouch.

Hedge funds fear bankruptcy after Porsche squeeze
Times Online

PORSCHE PUT GERMANY IN A BOX-STER
NY POST
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