THE problem in any discussion of hedge funds is seeing the wood from the trees. The use of clever strategies and plenty of leveraging is not new in the investment world, but what is now going on in the name of hedge funds goes much farther than that.

The Financial Services Authority has taken its time before opining on the matter, but now it is saying what many believe: in too many cases the term is seen as a licence for what amounts to insider dealing and market abuse.

And because of the instruments now available, there is often a complete lack of transparency about what is going on in the markets.

On Tuesday of last week, for instance, shares in Marks & Spencer perked up by more than 5p. The following day it was reported that an Icelandic investment group was believed to have acquired 3 per cent of the business. That added another 10p to the stock and, not surprisingly, caused something of a stir at M&S.

Having just seen a surly truce called in the battle over who should be chairman of M&S, Stuart Rose, the chief executive, had been hoping for a period of calm in which to try to sort out the more fundamental problems that the group faces. Instead, he learns that there is a Viking boarding party headed his way.

But is there? Cazenove, the M&S broker, has been asked to investigate, but, from the information available to it, cannot detect a 3 per cent Icelandic holding. Yet the rumours persist. The company has sent out Section 212 notices to try to establish what is going on, but so far no insights have been returned. The share price has edged back down.

It could just have been a traditional ramping operation. Hedge funds are not the only investors capable of setting a rumour running and reaping the benefits, but the FSA report does point out that some are certainly not beyond indulging in this form of entertainment.

Yet there remains persistent talk that those close to Baugur, the fast-growing Icelandic retail investor, have acquired a sizeable chunk of M&S. Thanks to contracts for difference (CFDs), they could have done this without buying the shares.

The Takeover Panel has decided that in bid situations, those with the economic interest in equities, usually meaning CFDs, will have to declare themselves. It seems that the FSA has come round to the view of many companies, which is that there is no reason to restrict this need for transparency to periods of takeover activity. It would require legislation to insist on such transparency, but the FSA has asked the Treasury to see how this might be achieved.

Companies that want to know the identities of their owners would applaud such a move. Investment banks will be more ambivalent. As the FSA points out, they appreciate the fees that they make dealing for the hedge funds and others who like to keep their movements secret. They will happily parade corporate clients in front of hedge funds in the knowledge that what the funds are seeking is the sort of inside information on which they prefer to trade.

Increasingly, the investment banks themselves, through their proprietary trading arms, become their own hedge funds. In theory, their Chinese walls prevent information seeping through from other bits of the bank, but there often appear to be some very well-informed positions being acquired. It does not require new legislation to deal with the worst of this sort of behaviour. Market abuse is already outlawed, as is insider trading. However, pinning down the culprits is difficult. The good news is that the FSA is more determined than ever to do so.

Letting rivals into the loop

MARKETS can be perverse and, at first glance, that might have been the reaction to seeing BT shares as yesterday’s biggest gainer among the blue chips. When a business has just agreed to assume extra costs in order to give a leg-up to its competitors, an increase of 4 per cent in the share price might not be the most obvious result.

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