Hedge funds are scrambling to assess the damage done to portfolios after bets on Volkswagen’s shares have turned sour.

Estimates of the losses suffered by funds that went short – borrowed shares and sold them in the expectation they could buy them back more cheaply – run into several billions of euros.

After Porsche declared it held sway, directly or indirectly, over more than 74 per cent of VW’s shares this week, fund managers have been struggling to buy back shares to cover their short positions, pushing the carmaker’s share price ever higher.

There is widespread speculation that the losses nursed by some hedge funds may be enough to force them under.

One hedge fund manager said: “Being long of VW preference shares and short of the ordinary shares was a very common trade and there may have been more than 100 managers doing it”.

Funds including Greenlight Capital, headed by David Einhorn, and Odey Asset Management have recently told clients that they had big short positions in VW.

Other managers, including Highbridge Capital Management, have sought to refute reports of big losses in VW.

Marshall Wace said its losses on VW trades “were immaterial”.

Citadel Investments, one of world’s biggest funds cited to have lost money on VW, said: “We have suffered no losses of substance on Volkswagen whatsoever.”

The losses have been exaggerated, argues Andrew Baker, deputy chief executive of the Alternative Investment Management Association.

He points out that the cost of selling VW short had become prohibitively expensive for many funds. What is more, the trade had become so “crowded” – that is, so many managers were doing the same thing – it would have warned managers of the high risks involved and “managers have become more risk averse”.

Nonetheless, said a manager, being caught the wrong side of VW’s rising share price may be the “straw that breaks the back of some funds”.

For the past year pressure on hedge funds has intensified as falling markets have hit performance and fees, and prompted high levels of client withdrawals.

Prime brokers that provide a range of services to hedge funds have become more risk averse in the face of extreme illiquidity and volatility in markets.

They are raising margin requirements and demanding higher levels of collateral from funds to set against borrowing. They have also narrowed the range of assets they will consider as collateral. As a result hedge funds are being forced to “deleverage” portfolios by selling shares into falling markets.

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