VW, Porsche and Hedge
Funds
-The Good, The Goodlooking and the Naughty?Professor Jan Simon
The Case
1
The Case
 On Oct. 28th 2008 Volkswagen’
Volkswagen’s market cap. > EUR 300B
(300.000.000.000). The Good!
Good!
 More expensive than IBEX 35.
 More than the ENTIRE car industry (ex(ex-VW).
 The most expensive stock in the universe (world).
world).
 10, 5 or may be 1 times the Greek deficit?
deficit?
 What happened?
happened? The GoodGood-Looking and The Naughty!
Naughty!
 ‘A couple of gamblers on the market got their odds wrong and
now they are pointing the finger at us.
us.’ Porsche Representative
 ‘Porsche cornered the market in VW shares (1) with false denials
of its intent to take over VW and (2) by engaging in a series of
manipulative derivatives trades to hide the extent to which
Porsche controlled VW shares.
shares. Plaintiffs in Jan. 25 2010 case 10 CIV 0532
US District Court Southern District of New York
Social Studies of Finance
 How to get a better insight into their DMP?
 Financial Economics:
Economics: Homo Economicus:
Economicus: Is rational,
rational, supremely
informed and optimizes his own utility.
utility. Even if not true,
true, he
behaves like it (Friedman 1953).
 Behavioral Economics:
Economics: Homo Psychologicus:
Psychologicus: Decisions
influenced by heuristics and biases (Tversky and Kahneman,
1974).
 Economic Sociology:
Sociology: Homo Sociologicus:
Sociologicus: Behaviour nested in
concrete social context and economic outcomes are a function of
this social context (Granovetter,
Granovetter, 1985).
 SSF: Social Studies of Finance is the application to financial
markets of socialsocial-science disciplines such as sociology,
sociology,
anthropology,
anthropology, and social studies of science.
science. (ESRC)
2
Methodology (*)
 Interviews (12/07 - 06/09 ):
 60 interviews in London, NY, HongHong-Kong and 3 other European
cities.
cities.
 36 Hedge fund professionals representing firms holding 15% of
global hedge funds assets under management.
management.
 24 Brokers representing 9 of the 10 largest global brokers.
 Ethnographic Research (12/07 - 06/09):


8 hedge funds
2 brokers
 Network Analysis:
Analysis:
 21 hedge fund professionals (15 in London, 3 in New York, 1 in
Geneva and 2 in an European city), representing 13% WWWW-AUM
 5 brokers
(*) Focus on longlong-short and eventevent-driven strategies.
strategies.
The Trade
 Jan ’08- Mar ’08:
 Market Cap VW: ~ EUR 40 B
 Market Cap Porsche: ~ EUR 11 B
 Stake Porsche in VW: 27% (Val.: ~EUR 11 B)
 Capture Value by buying Porsche and selling
short VW, an ‘arbitrage’ operation where one
‘gets’ Porsche for free!
 Condition: no acquisition of VW by Porsche
 Condition: no domination agreement (w/ 75% of
shares acquiring firm controls decisions.
3
Porsche
 Selling short: operation whereby one sells a financial
asset without owning it.
it. This is done by borrowing the
financial asset for the period of the short sell.
sell. When
buying back the asset it is delivered to the lender.
lender.
 No acquisition riskrisk- No domination agreement :
 Mar. ’07: ‘We don’
don’t want a majority in VW
 Mar. ’08: Supervisory board Porsche: will take majority stake
but will NOT raise to 75%
 May. ’08: 31% of VW, 20% of options but no intention of
getting to 75%
 Sept. 18, ’08: ‘Domination agreement is totally unrealistic’
unrealistic’
 Oct. 22, ’08: ‘No intention to go much above 51%’
51%’
Porsche
 Oct. 26, ’08:
 Announcement of agreement with VW
Chairman Piech on terms of a Porsche
takeover.
 Porsche reveals it controls almost 75% of VW.
 42.6% of ordinary shares
 31.5 % of cash settled options
 Lower Saxony State owns 20.1% of VW
 Maximum theoretical free float VW: 5.8%
 Total short interest VW: 12.8%
4
The Hedge Funds
 Jan. 25, ’10: 17 Hedge Funds sue Porsche AH SE, Dr.
W. Wiendeking,
Wiendeking, Dr. H. Haerter for:
for:
 False denials of its intent to take over VW
 Series of manipulative derivatives trades.
trades.
 Evidence:
Evidence:
 Previously mentioned denials upto 4 days before official
announcement.
announcement.
 Option stake was in existnce by midmid-2008
 ‘Cash settled options’
options’ give opportunity to physical delivery and
are thus disguised physical delivery options.
options.
 VW counts cash settled options when calculating stake.
stake.
 Banks parceled out so that hedging would not trigger public
announcement of banks.
banks.
 Porsche capitalized on the short squeeze by cornering free float,
float,
announcing it and then lending out at high rates.
rates.
The Hedge Funds
 DMP IS DISTRIBUTED (not atomic).
 Brokers bring information flow and basic ideas.
 ‘What is absolutely crucial is what is called flow information.
These hedge funds want to get an idea who is active. They
want to get a flavor of what the real money [traditional asset
manager] or other hedge funds are doing as well as what is
driving the price action. Is it the real money, is it the faster
money, is it corporate flows or central banks? That kind of
information is clearly sought after from the hedge fund
community.’
BR10
community.’
 ‘The way I see brokers is a process of scanning for money
making ideas. That is basically what you pay for. You pay
for research where they scan companies and they filter all
the valuation cases for you…’
HFM9
you…’
5
The Hedge Funds
 DMP IS DISTRIBUTED (not atomic).
 Other HFM bring knowknow-how, complex knowledge and
knowknow-how, support.
support.
 ‘There are three or four former [name of investment bank
HFM2 used to work for] people who are now hedge fund
managers who I stay in touch with…
with… We discuss ideas or
when I have a big position in a stock and it has been a
complete disaster, I will ask “Do you think that I am a
complete imbecile?”
imbecile?” And then he could say, “Yes because
you missed this point.”
point.” Or he might say, “I agree with you. I
think that it is where the market is missing the point”
point”, it is just
a kind of reassurance thing.’
’
HFM2
thing.
The Hedge Funds
 DMP IS DISTRIBUTED (not
(not atomic).
atomic).
 ‘I trust their opinion about stocks. I have had recently a situation
situation
where we were short one stock and the guy at [name of a
competing hedge fund] was long. So we met up inside our offices
with him to discuss why we had different opinions about the stock.
stock.
He is very smart, so I wanted to pick his brains and share my views
views
to see who was missing what.’
ANAB3
what.’
 ‘I was in a meeting recently where an executive of this hedge fund
fund
had invited 10 or 15 other hedge funds he knew well to discuss a
potential position. They were very open and they said basically they
wanted to buy this company and split it up. They put forth their
their
entire valuation models and we discussed it together. They then
explained how they were going to unlock the value in it. They then
then
asked: what do you think? Will you help us doing it?’
HFM9
it?’
6
The Hedge Funds
 HF-HF tie is an ET (Embedded Tie).
 ‘If you have a relationship with some other [hedge fund]
managers and can share ideas, it is worth a lot. For one guy
at a hedge fund to tell another guy what his actual position is,
whether it’
it’s large or small, is based on trust…
trust… HFM15
 ‘For hedge funds to have a good beneficial relationship for
both sides, you have to know each other and trust each other
and that is impossible without having that personal relation.’
relation.’
HFM24
 ‘There’
There’s always a degree of brotherhood;
brotherhood; you try to share
information and ideas. It is reciprocity, actually. You will not
keep those people as friends if you don’
don’t have something
else to offer.’
HFM15
offer.’
The Hedge Funds
 First there is intellectual trust,
trust, people where you trust their
judgments. By discussing with them, you know that you are
discussing with people who have done their work, have a sharp view
on numbers, cannot be messed around with by management, are
themselves smart investors, have a smart way of looking at things
things, a
certain vision and so and so, and then equally moral trust,
trust, people
that you would trust sharing your positions with and so on, you
know. While you are not discussing anything that’
that’s illegal you’
you’d still
know that it’
it’s information that is reasonably confidential and should
stay so.’
HFM1
so.’
 ‘It is mainly cross checking intelligence with somebody you trust,
trust,
somebody who actually shows integrity and he does want to
compare the notes with you.’
HFM10
you.’
 ‘What does trust mean? I guess I’I’ve never thought about that but I
suspect it is probably quite complicated. I suspect that each one
one of
us has a set of values that we operate under and I suspect that trust
really means that the person that you are interacting with shares
shares
those same values as you or has even higher values.
values.’ HFM22
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Findings: Networks are dense
(338 ties)
BR6
H1
BR3
H2
H16
H6
H17
H25
BR7
T3
H9
H18
H10
H20
T4
Broker
TRS6
H11
H22
T6
T5
H: HFM
H12
H23
H19
H24
T7
Same HF
T: TRB
Hedge Fund
TRS1
Tie
Findings: Networks are dense
(101 HF vs 237 BR/ 4.8 HFM vs 11.3 BR)
H1
H2
T7
New York
T5
H6
T6
H9
T4
H10
T3
H11
H25
H24
H12
H23
H19
Geneva
European city
H16
H22
H20
H17
H18
All others: London
8
Findings: ET are same strategy
(7/101 Ex-Strategy)
H1
Long-Short Strategy
H2
Event-Driven Strategy
Other Strategy
T7
New York
T5
H6
T6
H9
T4
H10
T3
H11
H25
H24
H12
Geneva
H23
H19
European city
H16
H22
H20
H17
H18
All others: London
Findings:
(83: work, 10 Soc., 9 Other)
H1
Prev. work exp.
Other
T7
H2
Socializing
T5
H6
T6
H9
T4
H10
T3
H11
H25
H24
H12
H23
H19
H16
H22
H20
H17
H18
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The Hedge Funds
 ‘Yes, there are many people that have
similar kind of trades. There is a certain
universe of consensus trades, everyone
has those trades... Because if one hedge
fund manager knows that something is
cheap he is likely to let another hedge
fund manager know it is cheap. People
share information, especially amongst
hedge funds.’
PBS1
The Hedge Funds
 Interviewer:
Are you familiar with the term ‘consensus trade’
trade’?
Interviewee:
Sure, the big one now is PorschePorsche-Volkswagen...You
Volkswagen...You know
Porsche got a chunk of Volkswagen. So a lot of people make valuation
valuation of
these two and then strip out one to see what the rest is worth. But indeed, a
lot of hedge funds have that trade on now.
Interviewer:
Are these trades across strategies or within strategy?
Interviewee:
Almost always within.
within. Those trades are mostly a function of
hedge fund managers talking to other hedge fund managers and brokers
brokers
talking to the same hedge fund managers. Most hedge fund managers
managers only
talk to people within the same strategy. What do I have to say to
to an
emerging markets guy? Don’
Don’t really know what he does and vice versa.
Also, what does an emerging market hedge fund care in Porsche? So
So his
broker will not even talk to him about it.
HFM8
 ‘I tell you something like Volkswagen and Porsche is broked by everybody.
everybody.’
HFM16
10
Conclusion
 VW: The Good?
Good?
 Meeting with Dr. Piech midmid-’08. What did he know? Respons.?
Respons.?
 Not sued!
sued!
 Porsche: The GoodGood-Looking?
Looking?
 Are the cashcash-settled options in reality delivery options?
options?
 Legal obligation!
obligation!
 But even if they weren’
weren’t, squeeze was predictable (hedging).
hedging).
 Moral obligation?
obligation?
 When was decision taken to acquire/
acquire/dominate and should that have been made
apparent?
apparent?
 Is Porsche’
Porsche’s 2008 PTP of EUR 8.6 B (6.8B on VW stake)
stake) anything to go by?
 Hedge Funds:
Funds: The Naughty?
Naughty?
 DecisionDecision-making process is distributed over several hedge funds.
funds.
 At times competing hedge funds sit together to make and implement investment
decisions
 The network risk reflected in consensus trades is not represented in their risk
management models.
models.
 THE GOOD, THE BAD AND THE UGLY!
Questions ?
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