Hedge funds were heading for a full-blown row with the German Government last night as it emerged that funds sitting on tens of billions of euro losses after short-selling Volkswagen could go bankrupt.

Porsche, VW's biggest shareholder, stands to pocket a quick €6billion (£4.7billion) profit from the short-selling.

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 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.

London-based Marshall Wace is understood to have incurred relatively small losses, of £5million, and Odey Asset Management - one of the capital's oldest hedge funds - warned investors it had lost out, although the fund is understood to believe it can claw back most of the losses.

One senior London-based hedge fund manager said: “This was just old style-cornering. Nothing like this has happened in Britain since the railway scams of the 1890s and it gives Germany a Wild West feel. If you did that here, you would never be able to trade with banks again,” he added.

The hedge fund manager said the biggest losses have been incurred by the proprietary trading desks of investment banks.

Deutsche Bank and Commerzbank have seen their shares plunge this week on claims they are exposed to the Porsche fallout. French bank Société Générale is also said to have held short positions.

BaFin, the German financial regulator, yesterday opened an investigation into recent VW trading to determine whether there was market manipulation.

A spokesman for Porsche denied any wrongdoing. Mr Baker said Aima is taking advice on whether German rules breach European Union law and may also lodge complaints with BaFin.

Porsche has said it will sell about 5per cent of its VW stake to help ease the shortage of stock. That would make it a profit of €6billion, more than the €4billion value of Porsche on the stock market.

The carmaker said the option sale was designed to avoid further market distortions. Porsche will have control of 69.1 per cent of VW as a result of the options sale.

However, hedge fund sources said Porsche may be forced to sell much more than this to cover the tax bill on its paper profit, which would drive down VW's share price farther.

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