Last week Volkswagen weren't having much of a good time: their shares were down more than 50% and the hedge fund vultures were circling as they started to bet heavily that the VW shares would fall. To make a bit of money off this, they short sold the equivalent of 13% of the VW shares with the intention of buying them when they had fallen, but they were a little short sighted (excuse the pun) and it's hurt them in a big way.
On Friday the VW shares closed at €210 and a lot of hedge funds had short sold the shares with the intent of buying them at a much cheaper price this week or next. Now comes the part they didn't expect: on Sunday Porsche announced that they actually owned 74% of all the VW shares and not the previously assumed 42.6%. This, coupled with the fact that Lower Saxony owned another 20%, meant there were only about 6% of publicly tradeable shares available. I'm sure you can see the problem. In a word: oooops.
The hedge funds' greed (and lack of research) had caused demand for the shares to far out-weigh the supply and as a result VW became the most valuable company in the world on Tuesday when it's shares reached an over inflated €1,005 each at one point.
The consequence of this behaviour is a lot of hedge funds are out of pocket in a big way; possibly in the region of €20 billion (£15.9 billion) and €30 billion. Now that's a lot of money to lose on a bet.
In a way it's good to see these hedge funds and other financial institutions (as the hedge funds weren't the only boys at the party) getting bitten so badly for their gambling. It'll teach them a valuable lesson, but you just know it's going to be the average Joe Schmoe who's got his pension tied up with these organisations that going to be hardest hit.
Now imagine if the value of my VW Golf GT were affected by this news. At the peak, my car would have been worth over £81 000. I could have sold it and made a killing :-) .