“This was supposed to be a very low-risk trade
and it’s a nuclear bomb which has gone off in
A hedge fund manager in the Financial Times on
• Could short sellers have predicted that VOW was a
• What flagged up the impending Short Squeeze(s) in the
• 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?
• 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.
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
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
What flagged up the second and most recent Short
Clients could infer that short interest in
VOW was high and had been so since
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
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.
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
One lender controls 65%of the
supply, which represents a serious
concentration of risk for the
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 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
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.