London is by far the largest centre for European hedge fund managers. The 900 hedge funds located in London accounted for four-fifths of European based hedge fund assets in 2006. If figures for fund or funds and US hedge funds with a trading desk in Europe are taken into account, London's share was more than 90 per cent. Other locations for hedge fund managers in Europe include France, Spain, Sweden and Switzerland.

London's share of global hedge fund assets increased from 10 per cent to 21 per cent between 2002 and 2006, making London one of the fastest growing hedge fund centres according to the 2007 edition of International Financial Services Limited (IFSL) Hedge Funds report.

Assets managed by hedge fund managers based in London totaled around $360bn in 2006, up 40 percent on the previous year, and a six-fold increase from 2002.

Factors underpinning London's strong position include its local expertise, the proximity of clients and markets, a strong asset management industry and a favourable regulatory environment. London is also a leading centre for hedge fund services notably prime brokerage services offered by the leading London based investment banks.

Total amount of money managed by hedge funds worldwide is estimated to be $1.5trn. There are estimated to be 9,000 hedge funds the world over presently. Estimated value of the Asian hedge-fund industry by 2010 is said to be $250bn

So far so good. But reports reaching here from across the Atlantic appear rather highly disturbing. On Monday last, the Financial Times reported quoting a US Congressional report that hedge fund Amaranth and its star trader Brian Hunter built up such large positions in the US natural gas derivatives markets last year that they single-handedly sparked abnormally high gas prices for consumers across the US..

The report is the first to lift the lid on months of frenetic trading that eventually cost Amaranth over $6bn in losses and sparked renewed fears of a hedge funds meltdown.

Concern is focused on the over-the-counter markets, where deals are negotiated privately between counterparties. Industry experts say OTC accounts for 75 per cent of US energy trading.

Yet they fall largely outside the scope of the US futures regulator, the Commodity Futures Trading Commission.

Carl Levin, a Michigan Democrat who chairs the committee, said “I don’t care whether they [Amaranth] lost all their money; they are gamblers. We do care when they take others over the cliff with them,” he said.

The report accuses Amaranth of “excessive speculation” that had a “direct effect on US natural gas prices and increased volatility in gas markets.

There was another report on Tuesday which said the fast moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations (CDOs). The failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of CDO debt market. The banks were not prepared to bid over 85 per cent of face value for CDOs rated “A” or better. Nobody knows how the price would have dropped if the auction had continued.Some buyers were said to be lobbing bids at just 30 per cent. There are said to be $750bn of what is called dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn

The hedge funds are highly secretive, independent companies that invest the money of the super-rich. Unbound by the structures of banks, where a fund manager cannot take risks for fear of upsetting clients such as pension funds, these men are free to use unconventional money-making techniques such as betting (or hedging) that a share price is going to fall. Typically, hedge fund manager charges 20 per cent of the profit he makes for a client as commission.

Hedge funds as a business activity began in the late 1970s when floating exchange rates and volatile interest-rate movements transformed the capital markets, and gathered momentum as info-tele technology and electronic trading became increasingly quick and sophisticated.

The term ‘leverage’ is the name of the game in this business. A hedge fund may be holding resources worth $100 million with an investment of only $5 million and that too in borrowed money. And they shun regulations. In fact they take such complicated and such sophisticated risks that no regulator until today has been able to understand their science and art of making astronomical profits/losses so as to be able to regulate them.

The emerging markets like in China, India and Pakistan have been the recent darlings of the world's mobile capital, acting as magnets for multinational corporations seeking new frontiers. But because they are not regulated or to be fair to them since they play outside the known parameters of the financial regulations there is growing fear even among the most liberal of the financial liberals that these funds have the potential to cause the next big crash.

Hedge funds pour money into emerging markets in the search for high returns. Pakistan’s stock market like India’s and China’s has nearly doubled in two years, hailed by country's leaders as proof that the Pakistani economy had taken off. For some, at least, it has - but the stock-market boom has greatly exaggerated Pakistan’s progress as it did India’s. There have been huge inflows of equity investment from hedge funds and a large portion of that money came not from New York, London or Frankfurt, but from some obscure tax havens.

Experts assert that hedge funds have the potential to wreck perfectly healthy and well-run companies. If the hedgies choose to short your shares [a contract in which shares are borrowed for a set period on the bet that they will go down in price, and are then bought back, hopefully more cheaply, and repaid to the institution that lent them] then your company had it.

Last year writing in the New Statesman around this time (Sell-out: Why hedge funds will destroy the world, July 7, 2006) financial writer Janet Bush said,:”If hedge funds were a country, it would be the eighth-biggest on the planet. They can sink whole economies, and have the potential to crash the entire global financial system. Yet they are beyond regulation. We should be very afraid.”