It's A Deal

October 29, 2008

Drivers (And Reality) Wanted

Seriously, what has become of the financial world?

You’ll be forgiven if you’ve spent all of your time fretting about how we’re turning our “free market economy” into one that isn’t, but what’s going on over in Europe is just classic. And galling beyond belief.

So you probably heard about what’s unfolding with Porsche and VW. The former let it be known Sunday night that it was effectively in ownership of three quarters of Volkswagen. That vote of confidence, along with the fact that there’d now be only a small percentage of VW stock actually freely floating, had the short sellers in a world of hurt. Yes, the surge in the shares briefly pushed VW to the title of the most richly valued company in the world, as measured by market cap. The shorts were handed theirs.  

Well, what’s the big deal, you might correctly be wondering. Happens all the time. It’s the market’s version of making your bed and sleeping in it.

But wait. It turns out that one unsuspecting side of the market didn’t see this coming. Poor old hedge funds, which, as we know, constantly look out for the good of the entire investment community, got blindsided by this one, and now feel the market owes them, at the very least, an explanation.

And that makes perfect sense. If you’re on crack.

Ask a hedge fund manager what time it is and many will tell you the SEC doesn’t require them to divulge that kind of information. Now they’re at the other end of the table, and they don’t like it.

Too bad.

Porsche didn’t buy its shares directly on the open market, but instead collected call options on VW, and was under no obligation to disclose its stake. One equities guy in Europe told Bloomberg that the process Porsche used to build its stake was “at best obscure."

Gee, that kind of sounds like Hedge Funds 101.

Maybe it’s a stretch to draw this parallel, but it seems to me this is yet one more example of so many market geniuses out there who are only able to maintain that status when things are rigged in their favor. When the tide turns, it’s time to bash the very practices that your industry has embraced for years. Or, better yet, just go crawling to the government.

This is in no way a diatribe against hedge funds as an asset class, but instead a rant against select managers who seem to think that something has to be wrong when they lose a boatload of money.

But here's the view of most folks: You made a bet, it went the wrong way, and you lost big. So be it.