I am more than a little amused at the saga of Porsche sticking it to the hedge funds through their stealth purchase of Volkswagen shares.

The small German sports-car manufacturer has moved closer to securing control of much-larger rival VW through a stealth strategy relying on sophisticated derivative instruments, and has been able to book big paper profits in the process. ...

Continuing its gyrations, VW's share price plunged 45% to €517 ($656) Wednesday after Porsche said it planned to sell as much as 5% in options tied to VW shares. VW's shares had soared 348% over the two previous sessions -- briefly making it with world's most valuable publicly traded company -- fueled by Porsche's disclosure Sunday that it had boosted its VW stake to 42.6% and held so-called cash-settled options linked to another 31.5% of VW's shares.

Porsche said Wednesday it didn't break any disclosure rules by quietly building an ever-larger position in VW through the use of cash-settled options. Cash-settled options, which are settled in cash instead of shares, don't need to be disclosed to regulators under German law.

But a Porsche spokesman acknowledged that the company has made a "sizable profit" this year from the use of such derivatives, adding that it could help finance its VW takeover. VW is Europe's largest car manufacturer by sales, rolling out six million vehicles a year, compared with Porsche's annual output of 100,000. ...

Porsche discreetly began buying VW options in 2005, when it first took a 20% stake in the company. Many of those options are believed to be priced below €200 and in some cases even below €100, allowing Porsche to pocket the difference when VW's shares are much higher. That could add up to billions of euros at current prices if the options are exercised.

In the previous fiscal year ended July 31, 2007, Porsche said it made €3.59 billion in pretax profit from stock-options transactions, more than it earned from the sale of cars.

The weekend disclosure by Porsche that it was gunning for a 75% stake in VW forced investors who sold VW shares short in recent weeks and months to reverse gear and buy shares to cover bets that the price would fall. In the process, hedge funds lost more than $20 billion, according to some market estimates.

Despite Wednesday's downturn, VW's share price is still more than double Friday's close of €210.85, leaving short sellers on the hook for major losses. Investors say Porsche misled financial markets in recent months by indicating it wouldn't aim for a 75% stake.

Dealbreaker speculates that Porsche has earned €6 billion in profits.  Good for them, I say.

Now, hedge funds are whining that they have losses and may go belly up.

The London-based Alternative Investment Management Association (Aima), the hedge fund trade body, said yesterday that it planned to ask the European Union to clamp down on a controversial German legal loophole that allowed Porsche secretly to take its VW stake to almost 75 per cent.

Andrew Baker, Aima deputy chief executive, said: “This sounds somewhat irregular. If you tried that in this country, there would be a number of questions to be answered.”

He said losses for hedge funds were likely to be less than a tenth of the forecast €20billion. “There are funds hanging on by their fingertips because of redemptions for whom this could be the last straw,” he said.

The casualty list of hedge funds hit by the Porsche squeeze on VW grew yesterday as it emerged that Steven Cohen's SAC Capital and Och Ziff, and Perry Capital, a key financier in Malcolm Glazer's takeover of Manchester United, were among the losers. Greenlight Capital, run by David Eindhorn, Marshall Wace, York Capital and Glenview Capital are also among about a hundred hedge funds thought to have made losses.

What is particularly amusing is that many of these Masters of the Universe who charge egregious fees and would have no problem imperiling the future of the world by raping the financial system so they can create dynastic wealth for themselves did not understand the rules by which they were playing.

Germany's stock market regulators are the laughing stock of Europe.

It is embarrassing that Porsche could have been allowed to build a secret options stake in Volkswagen equivalent to 32 per cent of its market value, on top of an existing holding of 43 per cent, with no disclosure. A false market of epic proportions was allowed.

But that does not mean those short-selling hedge funds nursing nasty losses have real grounds for complaint.

They knew perfectly well, or should have known, the lacuna in the German rules and the fact that such positions could be kept secret. Given the ferocity with which they fought proposals to close precisely this loophole in the UK, they have no excuse for ignorance and little cause for sympathy.

Is this not why hedge funds demand outrageous fees from suckers investors?  Are they not paid more in a year than a small city is paid in a decade to discover and exploit such loopholes in the regulations?

I would like to know if there were any German hedge funds caught in this short squeeze.  Volkswagen is the most heavily shorted stock in Germany.  Did the German money managers know about this rule in their market while the "dumb money", i.e. "foreigners," not know?  (It is axiomatic in financial markets that foreigners are usually the "dumb money," even when we are the foreigners.)

Yeah, hedge funds are worth their 2 & 20 alright.