By Paul O'Keeffe
Producer, BBC Radio 4 In Business
Hedge Funds are playing a bigger role in the City of London
The influence of hedge funds in the financial markets continues to grow. That means UK companies are increasingly keeping on hedge fund alert.
Carphone Warehouse's Peregrine Riviere knows all about hedge funds - he can't afford not to.
He's in charge of investor relations, keeping Carphone Warehouse in touch with its shareholders, soothing the nerves of big investors and making sure they continue backing the company.
And some hedge funds haven't made his job easy in recent months.
That's because they've been betting that Carphone Warehouse's strategy - including its push into broadband - isn't going to work.
"It does create a certain amount of ill will if we know that people are betting on our failure, but actually we find it extremely motivational," Mr Riviere tells Radio 4's In Business.
Even before the recent announcement that Carphone Warehouse had lost a deal to sell mobile contracts for Vodafone, hedge funds were betting against the company in a trade known as "shorting".
Hedge funds have been borrowing Carphone Warehouse shares - from brokers, for example - selling those shares, and then hoping that they can buy them back at a cheaper price when they finally have to give the shares back to the lender.
If Carphone Warehouse shares rise in price, then the hedge funds lose money; if they fall, they will be in the money.
Hedge funds don't even need to go through all that rigmarole to make this bet.
The City's financial wizards have come up with contracts that can replicate that sort of trade - they're called contracts for difference.
Shorting shares is one of the classic strategies of the close-to 60-year-old hedge fund industry, which was born in the United States.
Eye for a deal - Theo Phanos oversees a trader
Hedge funds have been involved in major financial events, such as when George Soros's Quantum Fund made $1bn in the UK during Black Wednesday in 1992.
His hedge fund successfully bet that sterling would be forced out of the ERM.
But in recent years, the hedge fund industry has exploded on both sides of the Atlantic.
Wealthy individuals and big institutional investors, like pension funds, have been looking for better returns.
At the same time, they are cautious of placing all their eggs in one basket, so one of the places they've been putting money is hedge funds.
Hedge funds have a wider arsenal of trading strategies at their disposal and face lighter regulation than a traditional fund manager, who invests money on behalf of ordinary investors.
"[Hedge funds] are highly influential," says Carphone Warehouse's Mr Riviere.
"Because of the amount of money that can be made, they are populated by highly intelligent individuals who often come from a more traditional institutional background, but are attracted by the much higher personal wealth that they can create by running hedge funds."
Indeed, the returns can be very juicy.
Hedge funds typically charge a 2% annual management fee and 20% of profits made.
Mr Riviere also notes that hedge funds' influence is increased by the fact that they often share information and can work together. "[They] do talk to each other," he says.
Tank firm battle
Hedge funds can get involved in the nitty-gritty of a company's future.
Trafalgar Asset Managers played a role in tank firm Alvis's takeover
Some publicly push for changes in companies, or play key roles in mergers and takeovers.
"We make sure managers are working for their shareholders because let's be clear, any management of a public-listed company should be working for its shareholders," says Theo Phanos, director of the London-based hedge fund Trafalgar Asset Managers.
His hedge fund was involved in the takeover of British tank builder Alvis by BAE Systems in 2004.
US company General Dynamics had been attempting to take the company over.
"We were aware that BAE had a major stake in Alvis, so we actually invested. We went to British Aerospace and said: 'You should outbid General Dynamics'. And that's ultimately what happened and we were instrumental in making that happen," says Mr Phanos.
Centaurus Capital, another London-based hedge fund, has been attempting to shake-up two big Dutch companies - Stork and Ahold - by getting them to refocus their business by selling off divisions.
As a result, the characterisation of all hedge funds as simply being focused on the very short term is misplaced, says Bernard Oppetit, chairman and chief executive of Centaurus Capital.
"We are not very short-term orientated," he says. "We are not buying and selling the same thing in a few hours. Our time horizon is very often a few months, sometimes a few years. We sometimes sit in the same positions for four or five years."
The recent debacle at US hedge fund Amaranth, which lost billions in days in a bet on gas prices that went hopelessly wrong, has again raised worries about the possible risks hedge funds could pose to the whole financial system.
The hedge fund industry points to the fact that the Amaranth implosion hasn't caused a market meltdown.
At Carphone Warehouse, Mr Riviere has his own complaints about "a minority of hedge funds" which try to boost their returns by spreading market rumours and myths.
But he argues that the rise of the hedge fund can't be seen as a bad thing for the British economy.
"It's part of London's credentials as probably the second most important financial centre in the world," he says.
"I get slightly irritated when a lot of UK plc tries to lay the problems of their performance... with the hedge funds."
And if the point needed underlining, it just so happens that Charles Dunstone, Carphone Warehouse's boss, is now a board member of another London-based hedge fund, Clareville Capital.
In Business: On the Hedge is presented by Peter Day on Radio 4. Scheduled Broadcasts are at 2030 BST on Thursday 26 October and at 2130 GMT on Sunday 29 October.