Wirecard short-sellers showed “bravery and belief”, as hedge funds vindicated by scandal-hit firm’s demise, says AIMA CEO Inglis

Poker

Hedge funds that bet against Wirecard, the German e-payments firm which last week collapsed amid an apparent widespread EUR1.9 billion fraud, showed “bravery and belief” and their actions have ultimately been vindicated, according to Jack Inglis, CEO of the Alternative Investment Management Association.

Using “forensic analysis”, hedge funds knew something was amiss in the scandal-hit DAX 30-listed firm a while ago, Inglis said, noting how the first queries into the company’s accounting stretch back to 2014 when short positions began to emerge.

“Yet the share price still went up. It takes bravery and belief to commit to short positions but at last those hedge funds who have stuck with it have been vindicated,” he observed on Tuesday.

The AIMA CEO said Wirecard’s collapse - which came after auditor EY could not verify the Munich-based firm’s reported cash balances - demonstrates that short-selling can help raise the alarm on a stock seen to be overpriced for whatever reason.

Inglis, who has headed the hedge fund industry’s global trade body since 2013, said: “Sure, there will be some who say it is wrong for hedge funds to benefit from corporate misery, but there would have been a lot less misery for those investors who continued to buy the shares - up to a peak of EUR191 in the summer of 2018 - had they paid heed to the public signals being put out by the short sellers.

“What is very clear is that short selling hedge funds did not cause the demise of Wirecard. Far from it,” he said.

The practice of short-selling – a core element in most typical hedge fund strategies – came in for sharp criticism earlier this year during the coronavirus-driven stock market collapse, including from the Bank of England governor Andrew Bailey.

In March, the UK’s Financial Conduct Authority temporarily halted shorting of certain Italian and Spanish companies, in line with similar measures taken by market regulators in those countries, following hefty losses in Milan and Madrid that month.

But the FCA later ruled out any formal ban on short selling, saying there was “no evidence” that the practice contributed to Q1’s historic market collapse.

Inglis said that Wirecard’s demise ultimately offers a “very powerful message” in the value of shorting.

“Most international regulators held firm in the face of market falls in March this year. They recognise the important role of short selling in fostering efficient markets and price discovery.”

Wirecard filed for insolvency on 25th June, with its former CEO Markus Braun, who had earlier been arrested, now reportedly released on a EUR5 million bail.

In February last year, BaFin imposed a two-month shorting ban on Wirecard shares, citing the aim of curbing threats to market confidence.

Inglis said: “AIMA argued vehemently at the time that imposing the ban was unjustifiable and that if market abuse is suspected then the authorities have all the tools they need in the Market Abuse Directive.

“Fast forward to today and Wirecard has since gone bust, the subject of a multi-year fraud involving EUR1.9 billion going missing, and their former chief executive has been arrested. The European Commission has called for a speedy investigation into any failures by BaFin in upholding EU rules on financial reporting.”

According to analysis by Ortex, the London-based equity analytics firm, hedge fund short-sellers were last week holding off from closing their short positions in Wirecard in anticipation of further falls in its share price, which would potentially boost gains ever higher.

Wirecard’s price, which last week hit a low of EUR1.14 per share, rallied on Monday following the announcement of its insolvency, reaching a high of more than EUR7 on Tuesday before sliding back to around EUR4 later in the day.