Yahoo! News – Look behind any major financial scandal these days, and chances are good you will find a hedge fund.
In some cases, these high-risk investment pools played a neutral, or even benign, role. They were, for instance, among the early skeptics of Enron’s accounting and have helped expose companies that egregiously backdated stock options.
In other scandals, however, their role was less laudable. In 2003, a hedge fund was caught cutting secret deals with mutual fund managers to trade their funds after hours at the closing price, making easy money at the expense of the mutual funds’ clients. Another hedge fund profited through a troubling handout in a congressional spending bill. These episodes show the power hedge funds possess. So does the surging size of the industry, now estimated to have $1.2 trillion in assets. And so does its ability to both make and lose money in a virtual nanosecond. Last month, a single trader at Amaranth Advisors in Connecticut lost $6 billion, about half of the company’s capital, in a matter of days by making bad bets on natural gas.
Whatever logic there was in allowing hedge funds to operate in secrecy is gone now that they have become such an integral part of the economy. The sheer scale of the money flowing into these funds – which make bets for or against various stocks, commodities, currencies, loan portfolios and other assets – is troubling.
