The short squeeze of death
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Wayne P. Weddington III
Author and hedge fund manager
Last week, Adolf Merckle threw himself in front of a train.
Merckle committed suicide on Tuesday January 6 2009 in the face of a crumbling financial situation. The German billionaire’s speculation in Volkswagen stock pushed his business empire to the edge of ruin. Last Fall, Mr. Merckle lost hundreds of millions of euros in a speculative battle with Porsche, the sports car manufacturer, to seize control of Volkswagen. Mr. Merckle had lost a sizable bet that shares in Volkswagen would fall, in a financial transaction known as short-selling. The loss of “the low hundreds of millions” does not seem a huge loss compared to an estimated net worth of $9.2 billion (Forbes 2008). But the agony of defeat at the hands of one of the decade’s most aggressive short squeezes proved too much to bear for Merckle. He eventually took his own life.
I am not making light of Merckle’s suicide. As pointed out by Douglas Faneuil on The Huffington Post “though often characterized as the result of some life event, [suicide] is nearly always caused by an underlying mental disorder… 90-95% of those who kill themselves exhibit clear and commons signs of mental illness well before their lives end. Certain tragedies… may trigger an acute depression, which can lead to suicide, but nearly all victims of suicide have… illness.”
Yet the event stands a macabre illustration to the perils of short selling – the short squeeze.
Editor's note: Wayne Weddington is a partner at Brunswick Capital Partners and author of "Do-It-Yourself Hedge Funds: Everything You Need to Make Millions Right Now," Grand Central Publishing
The Market Does Not Have a Brain
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Wayne P. Weddington III
Author and hedge fund manager
Forget about fundamentals. This market reminds me of the joke about two guys running from a bear. One asks the other, "Which way are you gonna run?" "Why, are you going to run with me?" the other guy asks. "No," says the first guy, "I don't want to run right over you!"
It is every man for himself right now. And people are running every which way.
Yes, we keep hearing that the current market situation is unprecedented, that it is historic. Well it is. Just look at all of the banks which were household names just a few months ago that either do not exist any longer or look really different (call that smaller), or are part owned by you and me, the taxpayers. These failures are huge.
And hedge funds - though intended to protect the investor from unwelcome swings and losses in bad times - have been decimated. Their failures do not make the news because they are not public companies. But the blood is running a river from Connecticut to New York.
As I walk down the streets of New York, no doubt grumbling aloud to myself, I have become the Scrooge of yore, nearly yelling at people in the streets who are smiling inexplicably. They are gleefully unaware of the impending doom. I feel I need to bring them down a notch.
I have not been spared the rout but my fortune is a tale of two cities. My long/short equity strategy, steeped in fundamental analysis, has suffered a fate similar to the market. It has outperformed the market, mind you, but that is scant consolation when the return has a negative sign in front of it. The sole shiny spot has been my global macro strategy. It has performed exceptionally with a YTD return above 200%. But the swings can drive a man to drink. And I comply.
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