Question

1. In the midst of the latest financial crisis, in October 2008, hedge funds believed they were on safe ground by short selling sharesof Volkswagen (VW), which they saw as overvalued when all car manufacturers are feeling the squeeze. What none of them knew was that Porsche had quietly been building up a 74.1 per cent stake in VW through intermediaries. What happened next? Did the hedge funds profit from their short sales of VW’s shares? Why?

Answer 1

The resulting panic caused a short squeeze in VW shares that saw the deeply troubled automaker briefly become the most valuable company in the world – despite being in the middle of the worst financial crisis since the great depression. VW’s share price briefly exceeded €1,000 intraday with a market cap of over €300 billion. Porsche netted itself more than $10 billion in profits in a matter of just a few short weeks, It was money that was badly needed by Porsche. Luxury car sales were plunging due to the crisis and Porsche was already saddled with significant debt.

The hedge funds who had sold VW short quickly saw their collective losses exceed $30 billion.