I am not sure you understand how hedging works. You don't go short and long on the same stock to hedge. You generally take one position (long or short) on the stock you are speculating on, and you take the opposite position with stocks in its peer group to protect against swings in the industry. The basis of the hedge is that stock performance is correlated within sub-industry. With a short squeeze like the one of VW stock, this type of a hedge wouldn't have helped.
But that was not my main point for this reply.
The German regulators should care about financial transparency, because even hedge funds (and even naked speculators) provide an counter force to the natural tendency of the stock market to always go up. if shorting was not allowed, the market has a natural tendency to go upwards. everyone benefits from the market always going up -- the buyer, the seller, the company, etc. a buyer can always sell the stock for more later. no one would benefit from a price drop. however, the stock price growth may not have anything to do with reality of company's books. shorting stocks helps keep the stock at a reasonable price point because when the stock price rises unreasonably, plenty of people would like to gain from its pending downward spiral.
as an example, look at china. no shorting is allowed there. their stock market went up, up, up. the balance shorting provided was not not presence. when people realized how vastly over rated the stock market was, it got hit. hit hard. now, it is one of the hardest hit market out there.
shorting (and other financial maneuvers) only work with greater transparency of information.
note that the hedge funds did take a big gamble and paid the price. I do not feel sorry for them.
(Anyway, I am sure I didn't do a thorough job of explaining the benefits of shorting and transparency.)