The takeover of Manchester United is yet another example of hedge funds muscling into new territory. But are these greedy "locusts" really so dangerous?

In pure stock-market terms, the takeover of Manchester United has been very tedious - the equivalent of a nil-nil draw in the Conference League. Smallish company receives decently priced takeover approach. Shareholders say yes. Er, that's it. The one interesting aspect of the saga was the revelation of how Malcolm Glazer is financing the £800m deal. He's providing a chunk of his own money. J P Morgan is chipping in with some bank debt. So far, so ordinary. But the biggest backers are three New York hedge funds - Citadel, Och-Ziff Capital Management and Perry Capital, which together are pouring £275m ($505.5m) into the deal in return for a special class of preference shares.

It is yet another example of hedge funds muscling into new territory. Hedge funds - unregulated, opportunistic, versatile and often highly borrowed investment vehicles - are now found in every corner of capitalism. They recently forced Deutsche Borse to abandon its bid for the London Stock Exchange, and later forced out the Germans' chief executive and chairman. There is barely a takeover battle these days in which hedge funds do not play a leading role. And every unexplained lurch in asset prices is attributed to them.

When George Soros bet against the pound in 1992, the industry was still in its infancy. Today more than $1trn is managed by hedge funds, and half of Mayfair is given over to their discreet offices. They are both hard to define and hard to assess. The difficulty in defining what they do is matched by the difficulty in deciding what dangers, if any, they might pose. You can't generalise with hedge funds, but the criticisms generally fall into three categories.

Count one: they are greedy short-termists meddling in the management of companies to the detriment of the real economy. In the Borse case, German politicians branded the two main players as "locusts". Outside Germany, however, this criticism has found less support. Many shareholders in the Borse were delighted with the stand taken by the hedge funds, believing the management was taking the wrong decisions and was insufficiently accountable. The hedge boys (and they are almost all boys in this industry) had the balls to confront them.

Count two: hedge funds are greedy short-termists who, by borrowing heavily and taking herd-like decisions, threaten the stability of the financial system. No one has forgotten Long-Term Capital Management, the hedge fund run by Nobel Prizewinning economists which collapsed in 1998 and came close to triggering a financial meltdown. Fortunately, the Federal Reserve Bank of New York came to the rescue in time.

Although hedge funds these days have less overt borrowing, it is impossible to say how geared they are economically. The financial instruments they invest in contain implicit leverage we know nothing about. In lay terms, some of them may be the equivalent of bookies accepting very long-odds bets. The risks are compounded by the way hedge-fund managers are rewarded. They typically take 20 per cent of the profits above a certain rate of return, but shoulder less or nothing of any losses. This again encourages them to borrow heavily.

The very low interest rates of the past few years have been especially helpful. As the Financial Times columnist John Plender recently remarked: "Hedge funds are the flawed and faddish product of a freakish economic cycle."

Count three: hedge funds are a conspiracy by the rich against the rest of us. This is the least explored criticism. Hedge-fund returns in the past 15 years have been high, probably much higher than the returns of ordinary pension funds or endowment policies. And, until very recently, the chief beneficiaries have been the wealthy: the minimum investment has typically been $500,000.

More contentious is whether their profits have been at the expense of small investors and savers. Many of the positions hedge funds take are in markets seen as zero-sum games. If someone makes a dollar profit, someone else is nursing a dollar loss. Hedge funds have been adept at recruiting the best talent. There is more than a suspicion that the smarter, harder workers in fund management have gravitated to the hedge funds, from where they outmanoeuvre their former colleagues. In return for huge fees, the banks save their best tips and investment ideas for their hedge-fund clients.

The rules are changing. Conventional pension funds are starting to invest their assets in hedge funds. Sainsbury's huge staff pension fund has just tripled its allocation to hedge funds. Investment houses are launching products so that small investors can dabble in "absolute return investment" - another name for hedge funds. But is it just coincidence that ordinary savers are being invited into this select club just as the sky-high returns of the past are evaporating?

Patrick Hosking is investment editor of the Times

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