Hedge funds targeted jackpot, ignored payday in wake of Wirecard insolvency filing

EUROPEAN MARKETS WERE gearing up for full business when news came that Wirecard, the German payments giant had filed for insolvency, but an analysis by Ortex, an equity analytics platform, showed that hedge funds did not move for a payday, ignoring €1.6 billion (euros), to wait to hit a jackpot that would come from the share further tanking.

In a note sent to Business A.M., Ortex, the financial analytics company, said its analysis showed that only 12.5 percent of short positions had been closed in the week to Thursday’s insolvency filing, leaving 16.8 million (15 percent of total freefloat) shorted.

Ortex then puts its estimate of open short positions to be worth €1.6 billion at the start of the Wirecard crisis, in what is now seen as a suggestion that hedge funds could have pounced on this to have a payday. In its note to Business A.M., Ortex said, “Hedge funds now stand to gain significantly more.”

It also noted that a number of hedge funds have maintained or increased their short positions in the past week, including Slate Path Capital, Samlyn Capital, Coatue Management, Maverick Capital, Coltrane Asset Management. No Nigerian fund management firm is known to play in these markets.

On Nigerian funds involvement offshore, Egie Akpata, director at Union Capital Markets, told Business A.M.: “[You are]100% correct. Local regulators don’t approve anything within offshore investing. But there could be activities outside regulated funds that invest abroad. How will they get FX? CBN no longer allows FX for even Nigerian Eurobonds. So would be patronizing black market for dollars, which local regulators cannot endorse.”

Akpata said regulators are being cautious, suggesting that it is aimed at developing local instruments. “If all the funds here went abroad, who will invest in local instruments? Besides, the further you are from a location, the less insight you have. Risk is much higher for a “small” fund manager here going to play in a market where they are totally irrelevant in every way - size, access to counterparties, closeness to regulators etc,” he said.

But on the Wirecard developments, Peter Hillerberg, who is co-founder of Ortex expressed surprise that even with share price dropping by as much as over 90 percent, hedge funds did not take profit on the company and run.

“In a week when the share price dropped by over 90% and the CEO was arrested, it would have been easy for hedge funds to take a profit and run. However, our data shows that the vast majority of short sellers have been holding their positions, and in some cases increasing them, in anticipation of a further reduction in the share price. It looks like their patience will pay off,” Hillerberg said.

Wirecard filed for insolvency Thursday amidst a major accounting scandal that was linked to a deep hole in its finances estimated at €1.9 billion (euros).

This followed quickly after the arrest of Markus Braun, its former chief executive officer, suspected to have falsified the company’s accounts. The company is known to process tens of billions of euros in credit and debit transactions every year. Braun had turned himself in to police upon which he was arrested.

Last Tuesday Braun, who is 51 years old, was bailed from police custody after posting a deposit of €5 million (euros).

“The management board of Wirecard AG has decided today to file an application for the opening of insolvency proceedings for Wirecard AG with the competent district court of Munich (Amtsgericht München) due to impending insolvency and over-indebtedness,” the company had said in a brief regulatory statement it released on Thursday.

The company’s shares, down about 90 percent in value in less than a week, were immediately suspended from trading in Frankfurt.