Vw Porsche Case Study


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Vw Porsche Case Study

  1. 1. Volkswagen AG “This was supposed to be a very low-risk trade and it’s a nuclear bomb which has gone off in people’s faces,” A hedge fund manager in the Financial Times on 28th October.
  2. 2. Agenda • Background • Could short sellers have predicted that VOW was a crowded short? • What flagged up the impending Short Squeeze(s) in the data? • What caused the price to jump from 200 EUR to 300 EUR in mid Sept 08 (intraday 450 EUR) • What caused the price to jump from 200 EUR to 950 EUR from the 27-28 Oct 08?
  3. 3. Background • Short selling is not a one-way bet – it has an asymmetric risk profile. When you are long and wrong, the share price can only go to zero (risk is limited). When you are short and wrong, you could theoretically lose an infinite amount (risk is unlimited). The unprecedented movements in the Volkswagen share price had all the hallmarks of a classic short squeeze; and recalls two cases from the 1920’s when investors became owners of the companies and surprised the market. • In the case of Volkswagen, the situation was complicated because various banks were writing call options to parties, (we now know one to be Porsche) which caused them to delta hedge up to 30% of the Volkswagen stock. As a result of the calls being exercised, and there being a sizeable short position, there was an extraordinary 300% rise in VOW shares, which temporarily caused VOW to become the world’s largest company by market capitalisation. • At the same time, short sellers lost money on a mark-to-market basis and faced dramatic margin calls. However, many short sellers are sitting tight, hoping that the share price will fall back to more realistic levels.
  4. 4. What evidenced that VOW was a crowded short? • It has been the 2nd most shorted stock in EMEA Automobiles using both Utilisation % and Market Cap on Loan % calculations for a long time • It has been the 2nd most shorted stock in the DAX using both Utilisation % and Market Cap on Loan % calculations. It has only recently been knocked off top spot • Demand to short VOW Ords is such that we see 33 separate Brokers (inc synthetic) with a position. This is almost as many major Brokers that are active in the market • Demand from the Prime Brokers outweighs the Custodial supply so that of the total shares on loan in VOW Ords (37.3 m), Custodians are only responsible for 28.07 m shares on loan. The rest is largely “broker” supply and may be sourced either from other brokers, or from external sources, e.g. domestic banks • Custodial supply has an extremely concentrated distribution • Demand to short VOW Ords spilt over into other VOW instruments e.g. VLKAY (ADR) – there would be no need to short less liquid Volkswagen shares in supply was plentiful in the Ords • Prime Brokers were nervous about recalls so booked many borrows in VOW Ords with an ‘agreed END DATE’ with their Counterpart that was in early 09
  5. 5. What flagged up the initial Short Squeeze in VOW? Up until the 10th September Custodial supply has been steady at c.42 m shares (red line). Most of what could be lent from this figure was on loan to Prime Brokers There suddenly began a decrease in this figure as Long only institutions who owned VOW sold their shares to non stock lending funds and to the banks which had written call options on Porsche. The reduction in Custodial supply from 42m shares to c.33 m forced people to cover their shorts (green line) and contributed to the price bounce from 200 to 300 EUR in mid October
  6. 6. What flagged up the second and most recent Short Squeeze? Clients could infer that short interest in VOW was high and had been so since June 2008. The percentage of shares outstanding on loan was consistently above 12% when people knew that the Free Float was limited due to Porsche’s equity stake. Utilisation was above 50% and then spiked in the last few weeks to 67% of Custodial supply. So when Porsche announced on Sunday 26th Oct that they owned 75% of outstanding shares either directly or through options, hedge funds were forced to cover and banks were forced to buy shares to hedge their option liabilities.
  7. 7. Evidence that VOW was a crowded short Demand to short VOW is such that we see 33 separate Brokers with a position. They are in turn supporting numerous organisations with a short position in this company. The lending balances are extremely concentrated. One lender controls 65%of the supply, which represents a serious concentration of risk for the borrowers.
  8. 8. Evidence that VOW was a crowded short Four of the largest six recent stock loan trades between 22 and 25 Oct. were booked as TERM trades. There were two reasons for this. Firstly, hedge funds wanted to avoid being recalled in the stock. Secondly, Banks which had written the call options were long VOW stock as a delta hedge and were lending it on a term basis to help finance their long position. These banks have largely stopped lending VOW stock.
  9. 9. Conclusions • VOW remains a live story • The leverage involved is still huge • VOW’s market cap is EUR 112bln • POR’s market cap is EUR 8.6bln • If proof were needed that short-selling is a high-risk activity, this is the perfect example
  10. 10. Banker of the Year 2008? Holger Härter, CFO of Porsche Porsche earned EUR 3.6 billion in 2007 from hedging activities. They earned EUR 1 billion from selling cars. This year they have announced a special dividend for Porsche shareholders. The Porsche share price has declined by 39% year to date.