Hedge funds reap €1bn in a week from Wirecard collapse

UK and US hedge funds are sitting on more than €1bn of profits over the past week after their bets against German payments company Wirecard were vindicated by its dramatic collapse.

Chris Hohn’s TCI Fund Management and Paul Marshall’s Marshall Wace, both London-based, are among those enjoying big gains after a week in which the German fintech has said €1.9bn of cash was missing, its former chief executive was arrested and the company filed for insolvency.

Since whistleblower allegations of accounting fraud surfaced, Wirecard has become one of the EU’s biggest targets for stock shorting — where investors borrow shares and sell them, with the view of buying them back later at a cheaper price and making a profit. Last year, the company was the subject of an unprecedented two-month ban on such bets, imposed by BaFin, the German market regulator. 

TCI, which in April increased its bet against the firm to 1.53 per cent from 1.04 per cent of the shares, made a profit of as much as €193m in a week, according to Düsseldorf-based data group Breakout Point. Last month, TCI filed a complaint to Munich prosecutors, calling for a criminal investigation into alleged accounting fraud.

David Greenspan’s New York-based Slate Path Capital, which this week increased its negative bet to 1.75 per cent of the company, has made an estimated gain of €220m.

The top eight short-sellers made at least €1.1bn over the past week, according to Breakout Point. Its founder Ivan Cosovic said the vindication was “long awaited”.

“Insolvency is the predictable outcome of fraud with debt,” Carson Block, founder of short-selling firm Muddy Waters, told the Financial Times. Mr Block said he did not have a short position in Wirecard, as no stock was available to borrow.

While there has been a small decline in short-selling interest over the past week, the stock has nevertheless become one of the most expensive in Europe to borrow, according to data group IHS Markit.

Marshall Wace first disclosed a bet against Wirecard more than two years ago. It made a profit of around €150m over the past couple of weeks, said a person familiar with the firm’s positioning. New York-based hedge fund Coatue Management, founded by Philippe Laffont, also held a large short bet.

A number of short sellers have now turned their fire on German financial regulator BaFin.

When BaFin banned shorting of the stock last year, it cited Wirecard’s “importance for the economy” and the “serious threat to market confidence” following a collapse in its share price. It later filed a criminal complaint against two FT journalists and a number of short sellers, accusing them of potential market manipulation.

“Their record on this has not been good,” said one hedge fund executive. “Their starting point has been a distrust of shareholders generally, particularly short sellers.”

“When the regulator is as incompetent and craven a regulator as BaFin, the German market becomes a paradise for financial criminals,” said Muddy Waters’ Mr Block.

BaFin declined to comment.

laurence.fletcher@ft.com