The BBC has a very succinct description of why those holding VW Short positions found themselves up the creek without a paddle:
What is upsetting the hedge funds is that if between 10% and 15% of VW shares were on loan to be shorted and only just over 5% were available in the market, it is likely that many of the funds that shorted VW had borrowed the shares from Porsche.
It meant that because Porsche had not declared the proportion of VW shares it controlled, traders may have been indirectly and inadvertently borrowing shares from Porsche, selling them to Porsche, buying them back from Porsche and then returning them to Porsche.
More from the BBC article here.
They left out the “and lose €25 billion in the process” part of that share swapping exchange.
And it gets even better. The best part of this may well be that even though Porsche has just eliminated a large number of their potential customers they are probably not too worried since, as The Irish Times points out, they have made three times as much money in the last few years trading options with the Hedge fund managers than they made from selling the cars that those managers so love to buy.