VW Shorts: Who Goes Under? ($vow)

The FT has an article on the carnage from Volkswagon (VOW).

From the Article:

After Porsche declared it held sway, directly or indirectly, over more than 74 per cent of VW’s shares this week, fund managers have been struggling to buy back shares to cover their short positions, pushing the carmaker’s share price ever higher.

There is widespread speculation that the losses nursed by some hedge funds may be enough to force them under.

One hedge fund manager said: “Being long of VW preference shares and short of the ordinary shares was a very common trade and there may have been more than 100 managers doing it”.

Funds including Greenlight Capital, headed by David Einhorn, and Odey Asset Management have recently told clients that they had big short positions in VW.

Other managers, including Highbridge Capital Management, have sought to refute reports of big losses in VW.

Marshall Wace said its losses on VW trades “were immaterial”.

Citadel Investments, one of world’s biggest funds cited to have lost money on VW, said: “We have suffered no losses of substance on Volkswagen whatsoever.”

The losses have been exaggerated, argues Andrew Baker, deputy chief executive of the Alternative Investment Management Association.

He points out that the cost of selling VW short had become prohibitively expensive for many funds. What is more, the trade had become so “crowded” – that is, so many managers were doing the same thing – it would have warned managers of the high risks involved and “managers have become more risk averse”.

Einhorn’s silence is concerning. It is so for a couple reasons. First, other managers have spoken out in regard to their losses and second, Einhorn has been uncharacteristically silent. In the past he has been very forthcoming on a range of subjects and investors must be concerned about his notable silence now.

Shorting has been hugely profitable the past year but an episode like this underscored the risk involved in it. When you “go long” and buy a stock your loss is limited to 100%, the amount you invested. When you “short”, your loss in unlimited. If you short at $10 and it goes to $30, your loss is 200%. In severe short squeezes, it can do so in hours or minutes.

I think many shorts have started to operate as though things will just keep going down, no different than those who bought things assuming the price would just keep going up.

FULL FT ARTICLE

Disclosure (“none” means no position):None
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