EVEN to the City’s most seasoned operators, what has happened over the past two weeks has been remarkable. We have witnessed such huge swings in share prices that the stock market has looked like a casino.

Why was HBOS worth 225p 10 days ago and this weekend 310p? The same is true of nearly all of Britain’s biggest banks and other large corporations — their share prices are being tossed round as if they were little more than spivvy stocks on the Alternative Investment Market.

Some £11 billion was wiped off the market value of Vodafone after a few hours of frantic trading last week when the telecoms company announced profits at the low end of expectations. It was a huge over-reaction.

The answer to this volatility lies with hedge funds and the increasing role they play in the market — and we had better get used to it. Collectively, hedge funds have become the most important players on the stock market, both in terms of access to capital, the way they leverage that capital, their financial acumen and their buccaneering appetite for risk.

The instability in share prices may be extreme at the moment, but it is going to stay with us.

There are two interpretations as to why stocks have jumped so much in the past few days. The first is that the big bet in the first half of the year was to go short on financials and long on commodities. That has now run its course and the closure of these positions is what has caused the spikes.

The second interpretation reflects the enormous changes taking place in fund management. The days when long-only fund managers at Legal & General, Scottish Widows, Standard Life and M&G controlled the destiny of our corporate giants has long gone.

Their funds are still big and important, but their firepower is slowly being diminished by pension funds reallocating capital to the less risky bond markets. As a result, their business models are starting to look outdated.

Inversely, hedge funds have got more powerful. They are attracting tremendous inflows of capital and they are becoming increasingly influential on the mergers- and-acquisitions landscape.

That power pendulum is only going to swing further towards hedge funds. As the likes of Lehman Brothers, Citigroup and Morgan Stanley reduce their risk appetite, particularly in their own proprietary trading desks, they will lose their top stars to alternative asset managers.

This will result in a huge transfer of talent out of investment banking and the stars will go to the places where they are paid the most. The migration will have wide implications for investors.

Get used to volatility, get used to short-termism (hedge funds can recycle their cash 20 times in a year) and get used to herd-driven investing.

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