Hedge funds 'in tears' as VW shares soar

published 31 October 2008

"I have had hedge-fund managers literally in tears on the phone," a London-based car analyst told the FT. Hedge funds are thought to have lost €20bn-€30bn after bets that shares in German car maker Volkswagen would fall went badly wrong. They had sold short (borrowed and sold, in the hope of profiting by buying back at a lower price later) almost 13% of the firm's shares. But last Sunday, Porsche, which had signalled in spring that it was unlikely to increase its control over VW, disclosed that it controlled not just 35% of the group, but 74% an equity stake of 43% and the rest in options.

Hedge funds scrambled to cover their short positions, and because the free float is so small the German state of Lower Saxony holds 20% the rush sent the shares rocketing. It rose fivefold in little more than a day; on Tuesday, VW's market capitalisation briefly exceeded Exxon Mobil's, making it the largest company in the world. On Wednesday the price fell as Porsche sold some shares to increase the free float.