While the explanation is clear, it should address the simple steps these hedge funds should have taken to protect themselves.

The hedge funds knew that VW was largely owned by big institutional investors. They knew Porsche was interested in owning VW. They may have had good reason to short VW, but if they were going to do that, why didn't they just buy some cheap, far out, short term call options that would have protected themselves from the divide-by-zero problem? The purchase would have been far smaller than their potential profits had they been right about VW declining like GM, Toyota, etc.