Tuesday, October 28, 2008

Nope - Hedge Funds Don't have Outsized Impact on the Markets

We talked about the crazy action in German car maker Volkswagen earlier this month

And you thought the stock market had to do with fundamentals? Not anymore. Thanks for a reader for sending this blurb about Volkswagon - its an interesting read if you want to know how big money now controls the stock market.
  • Volkswagen AG today surpassed Toyota Motor Corp. to become the world's biggest automaker by market value as the shares benefit from hedge-fund trading strategies and the collapse of Lehman Brothers Holdings Inc.
  • Volkswagen is up 84 percent in 2008 and surged as much as 55 percent today. Traders who shorted the shares on expectations they would decline on Porsche SE's bid for a majority stake were forced to close their positions, according to three people in the securities-lending business who declined to be identified. The failure of Lehman, which lent Volkswagen shares to short-sellers, probably helped trigger a so-called short-squeeze, they said.
  • ``This is a popular, crowded short play that has caused the shares to become disconnected with the company's fundamentals,'' said Renaud Berenguier, who advises hedge funds on equity trading at Aurel BGC in Paris. ``You take one of the biggest prime- brokering lenders, and one of the most shorted stocks in Europe, and this is the result.''
Well as of today, Volkswagen has gone from the biggest carmaker by market value to the biggest company in the world by market cap - thanks to short sellers covering en masse! Again - this is all becoming laughable. The hedgies have made the world casinos - errr, stock markets about nothing other than random bets that are so non correlated with any sense of fundamentals it's a farce. This great washing out of the hedge funds is going to bring some sense of equilibrium to the market - otherwise no one will bother to partake. Unfortunately the process of winnowing them is killing us all.

Now when we talk about the effect hedge funds can have on lightly traded small caps and how "naked shorting" was "winked" at by the SEC for all these years - you can only imagine how powerful the effect is on some no name small cap, when this type of action is being done in a large company like Volkswagen.
  • Germany's financial-markets regulator is looking into trading of Volkswagen AG shares after Porsche SE's plan to raise its stake in the automaker triggered a fourfold increase in two days.
  • BaFin is monitoring Volkswagen and hasn't started a formal probe, said spokeswoman Anja Engelland. The gains follow Porsche's Oct. 26 announcement that it plans to increase the stake in Volkswagen to 75 percent. The move forced short-sellers to cover their bets on a decline in the stock.
  • Volkswagen, Europe's biggest carmaker, is the most shorted stock in Germany's benchmark DAX Index. The so-called short squeeze today pushed the value of Wolfsburg, Germany-based Volkswagen's common shares as high as 296 billion euros ($370 billion), more than Exxon Mobil Corp.'s $343 billion at yesterday's close in New York, according to data compiled by Bloomberg.
  • ``The regulator needs to investigate,'' said Piers Hillier, head of European equities at WestLB Mellon Asset Management U.K. Ltd. in London. ``The bigger question has to be why they have not done so already. If ever there was an example of market manipulation, this is it. Porsche's stake-building process is at best obscure.''
  • Until yesterday, when the stock more than doubled, Volkswagen's largest gain in almost two decades was a 27 percent jump on Sept. 18.
  • ``Volkswagen has been one of the greatest shorts of hedge funds, and it's been an absolute, absolute disaster,'' Emmanuel Roman, co-chief executive officer of GLG Partners Inc., said at a conference in London on Oct. 23. ``It's been very painful.''
  • "Each and any short seller in the world is trying to close up their position and there is no way they can do it except for trying to buy like mad," said FrankfurtFinanz analyst Heino Ruland.
  • "We were joking before about the share price hitting 1,000 euros, and all of a sudden, it was there," said one Frankfurt-based trader. "This is perverse."

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