Credit crunch: shadows who move markets

Who are these enigmatic hedge fund managers now under the spotlight? Ross Clark introduces the top players

Financial crisis: A survival guide
On modern housing estates, it is safe to assume that the more agreeably pastoral the street name, the more brash and unpleasant the street. So it is with hedge funds.

Their name conjures up images of suburban respectability, of neatly trimmed gardens in Beckenham inhabited by soberly dressed bank clerks. The reality, of course, is a world of sharp deals and calculating plays on the share prices of underperforming companies.

But who are they, these hedge fund managers who have reputedly been making fortunes from economic misery while the rest of us have seen our share portfolios shrink?

Unlike the yuppies of the 1980s, "hedgies" - or "the new masters of the universe", as Tom Wolfe dubbed them - have crept up on the financial world virtually unnoticed - at least until Wednesday's raid on HBOS.

True, one hedge fund manager, Arpad Busson, chairman and founder of EIM, which is a fund of hedge funds, is dating Uma Thurman, but it hasn't exactly made him a household name.

But there is none of the swagger of the Flaming Ferraris, the vulgar band of traders at Credit Suisse First Boston who famously posed as the Reservoir Dogs for photographers as they entered a London restaurant and one of whose number, Lord Archer's son James, was banned from working in the City for life after being caught trying to manipulate the Swedish stock market.

If a hedgie owns a fast car he can't necessarily be bothered to drive it. One of the few to have obtained a public profile was Bertrand des Pallières, head of the hedge fund SPQR - less a Flaming Ferrari than a Mouldering Maserati.

Last year he baffled officers at a car pound by failing to pick up his £80,000 Maserati Cambiocorsa after it was towed away for his failure to pay 65 congestion charges. When he did eventually collect the vehicle shortly before it was to be auctioned, he said: "I drive it in summer and this summer I am too busy."

Few outsiders could name a single hedge fund, let alone explain what they do - which is, in short, form independent companies, invest the money of the super-rich and, through an alchemical process that involves calculated risk, create more money.

Unbound by the structures of banks, where a fund manager cannot take risks for fear of upsetting clients, hedgies are free to use unconventional money?making techniques, such as betting (or hedging) that a share price is going to fall. Typically, a hedgie picks up 20 per cent of the profit he makes for a client.

Robin Griffiths, who runs a £40 million hedge fund called the Worldwide Absolute Return Fund for Cazenove Capital Management, explains: "The tolerance for losing money in the hedge fund world is very small.

The clients say, 'Look, I didn't ask you to beat an index, I didn't ask you to shoot the lights out. All I asked was to make me money.' That's the main difference between hedge funds and the rest of the banking industry."

So, back to the quiz. Anyone heard of TCI, Centaurus, Toscafund? Thought not. And yet the wealth of the top hedge fund managers dwarfs that of the top brass at many City firms. Michael Hintze, the chairman of CQS Partners, has an estimated £275 million, putting him on a par with your average chief executive of a City bank.

Noam Gottesman, founder of GLG, is reputed to have earned £225 million in 2006. Louis Bacon of Moore Capital is thought to be worth £1 billion.

Anonymity has brought its rewards. Few, until this week, have been aware of the more dubious practices employed by hedge funds to generate large profits even when the markets are on a downer.

Yet there is nothing new about what happened to HBOS on Wednesday. Everyone has heard of Nick Leeson, and many recall that James Archer was sacked from his City job. But how many people know the name Philippe Jabre?

He has the distinction of earning the biggest fine handed down by the FSA - £750 thousand - after he was found guilty of "market abuse" while taking a punt on the share prices of Japanese banks.

Whispered rumours have long been a feature of the dubious hedge fund operators and were responsible for sharp falls in the share prices of Barclays and the Royal Bank of Scotland last autumn.

Insiders speak of "men in dark glasses" with mobile phones who will deliberately spread news of an emergency loan or some other piece of news calculated to drive a share price down.

But if hedgies have a reputation as clever, manipulative and slightly shady traders, they haven't managed to impress all insiders. This week's raid on HBOS is not so much a sign of intelligence as a sign of an industry in dire straits, says Tim Price of the wealth management group PFP.

"There is more confidence, more of a swagger to hedge fund managers than to other City workers," he says. "But it isn't a case of them having more intelligence. In the words of Warren Buffett, the tide has gone out and an awful lot of them have been caught swimming with no clothes on.

"It is an open secret that a lot of the leveraged funds will collapse or wind themselves up over the next six months. It is a bit like 1999 when a lot of City people left to set up dot-coms and were then left trying to work themselves back into their old jobs."

Hedge funds may represent new money but they are on the traditional side when it comes to their tastes. Not for them the glass towers of the City: they tend to be based in the West End and are responsible for a recent surge in rents in St James's.

Hedgies are not ones to buy glass penthouses, says Ed Mead of the estate agent Douglas and Gordon: they quietly buy houses in traditional parts of Chelsea or Kensington.

In June 2006, the hedge fund industry hired Knebworth, the stately home outside Stevenage, and staged a rock festival dubbed "Hedgestock". There, they quaffed champagne, took parachute jumps and listened to the Who.

They even persuaded Roger Daltrey et al to play for free, on the understanding that hedgies would donate generously to Daltrey's chosen charity, the Teenage Cancer Trust.

One purpose of Hedgestock was to portray the hedge fund industry as socially responsible. Their growth was partly a response to regulation in banking - they are a vehicle for keeping secrets that public companies would have to divulge.

According to Hugh Adlington of Rathbone Brothers, fewer than one in 20 hedge funds would meet the basic requirements of due diligence and competence that are required of pension fund managers.

But then, the term "hedge fund" covers a multitude of different organisations, he says. There are 11,000 of them, though many are "two men and a dog" operations. It is among these, rather than the larger funds, that the culprits for this week's attack on HBOS are likely to be found.