Ask the man on the street what a hedge fund is, and you are likely to get a blank look. If he recognises the term at all, he might associate it with the infamous George Soros, who made $1bn (pounds 610m) from a bet against the pound and caused it to crash out of the ERM, leading to "Black Wednesday".
For UK investors, hedge funds are best known for short selling, where a trader sells a share he doesn't own, hoping its price will fall, giving him a profit.
The practice has been attacked for pushing the stock markets down and causing volatility in share prices. But Stanley Fink, 45, the smart and articulate chief executive of Man Group, the world's largest independent hedge fund company, is as calm as calm can be. That could be something to do with the company's funds producing a return of between 32 per cent and minus 1.9 per cent last year, while the FTSE 100 fell by 29 per cent. Man's funds under management boomed 120 per cent to pounds 16.5bn and profits were up 53 per cent to pounds 297m in last week's annual results, its fourth year of rapid growth. Its shares have nearly tripled in value during one of the worst bear markets in history.
But although Man Group is the largest independent hedge-fund manager in the world, is based in London and is half way up in the FTSE 100 index with a valuation of pounds 3.7bn, British investors are not interested. Less than 1 per cent of Man's funds under management come from UK customers; Europeans and investors from the Far East take the lion's share.
But it is nothing to do with the Soros effect, it is the British "love of shares," according to Fink. "You've got to put it within a historical perspective," he argues. "Everyone quotes the fact that with a long-term view, equities are always safe. But no one ever looks at the data on Japan, on Germany, Poland or Russia.
"In the UK, equities have been successful. But if you look at a lot of places, if you have had a world war, a change of the political system, hyperinflation, or devaluation, equities have been a disaster. In the UK you've never suffered that."
High inflation in the UK made equities and property more attractive, while the low capital gains tax relative to income tax also made gains on share sales look good. "Which has meant selling alternative products is more difficult. Also, because of the welfare state and how it operates, the Brits don't save much. The median Brit has less than pounds 1,000 in liquid savings, while a Swiss or German probably has 10 to 20 times that. There's a lot more people there with pounds 100,000 to invest, whereas in Britain those people only work in the Square Mile."
But the high returns are starting to get noticed, and Man's surprise sponsorship of the Booker prize has increased its profile. However, in the UK, hedge funds cannot market their products to retail investors, but must go through an independent financial adviser to protect the inexperienced.
It isn't just marketing that attracts the attentions of regulators. In the UK, the Financial Services Authority has proposed that the amount of short selling in a company be published, rather than be revealed by rumours flying around the markets. In the US, the regulators are even more on the tail of the hedge funds. The Securities and Exchange Commission, the US regulator, is nearing the end of a year-long inquiry, and is likely to impose restrictions. …