Porsche cleared over short-selling profits

The news leaves hedge funds with their pockets empty and noses bloodied after the remarkable events in the autumn of last year that briefly made VW the world's most valuable company, worth $287 billion (£200 billion).

Hedge funds took highly aggressive "short positions" in VW last year, betting the shares would fall. But they were suddenly caught out when Porsche revealed that it had secretly built up a 74% stake in the company.

The shares rocketed to more than ¤1000, leaving hedge funds nursing losses of up to ¤40 billion by some calculations.

The effect of the gamble was seen this morning in a ¤6.8 billion (£6.3 billion) windfall profit announced by Porsche, lifting its pre-tax profit to more than twice its revenue.

Hedge funds were left furious, claiming it was unfair that Porsche had been able to hide its position - a tactic often used by hedge funds themselves.

But the German regulator Bafin today said that it had concluded its investigation into the carmaking giant and had found "no evidence of wrongdoing".

The decision kills off in effect any chance of the short-sellers launching legal actions to try to recoup their losses.

Numerous corporate and individual investors were burned by the VW share spike. It cost at least one mogul his life: drug billionaire Adolf Merkel, 74, had an investment firm which lost £1 billion in the affair.

Media reports put him as the biggest single loser in the debacle and it sent him into a tailspin of depression. He threw himself beneath the wheels of a train in January.

In short-selling hedge funds sell borrowed stock in the hope that the share price will fall, enabling them to buy the stock back more cheaply and return it to their prime broker, pocketing the difference.

The system fails when, as with Volkswagen, the stock shoots up rather than plunges. Hedge funds are left with two options: buy the stock back at the inflated price and accept a loss, or keep the loan open and hope the stock falls again.

With Porsche secretly acquiring some 74 % of VW shares through intermediaries, there were not enough shares to go around to plug the gaps.

The Porsche disclosure was likened by one hedge fund manager to a "nuclear bomb going off in our faces", describing the resulting losses as "a bloodbath".

For many impartial observers, the biggest single loss in the history of hedge funds was nothing less than just deserts for "vulture capitalists".