CFO vs. Hedge Funds

Tue, Nov 11, 2008

CFO Central

In the right corner - Holger Haerter, Porsche’s “CFO extraordinaire”. One of the brightest stars in the automotive world; credited with keeping the German car manufacturer highly profitable in good times and bad (Cayman turned a profit on the very first unit sold!). Mr. Haerter also has a knack for derivatives trading. In the left corner - the world’s most prominent hedge funds.

Over the past few months, hedge fund managers were making a reasonable bet that Volkswagen was grossly overvalued, fueled by a pending Porsche takeover. Taking the global economic downturn and the state of auto manufacturers into account, particularly in America, shorting VW made perfect sense.

On October 26th short sellers were dumbfounded when Porsche announced it has secretly accumulated 32% of VW stock via derivative contracts, bringing its total stake to 75%, essentially wiping out all VW shares available for trading (the rest are held by government and index funds). Short sellers faced a prospect of a “short squeeze”. Rushing to buy stock at any price to cover bets and sending VW valuation into the stratosphere.

Briefly in October, Volkswagen became largest company in the world by market capitalization! To add insult to injury, all this time Porsche was making money lending its VW shares to hedge funds, whom were required to borrow one VW stock for each stock shortened. By some estimates Porsche netted $7.5 to $15 billion in a few days.

And a KO victory goes to Mr. Haerter from Germany!

This post was written by:

Garry - who has written 4 posts on CFO Lounge.

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