AT 9pm last Sunday, Chris Hohn, the hedge-fund manager whose Children’s Investment Trust (TCI) fund led the shareholder revolt over Deutsche Börse’s £1.4 billion bid for the London Stock Exchange, received news that the German exchange had withdrawn.

“I knew we would succeed,” he said. “But I wasn’t expecting it so soon. I thought we would have to remove the management in mid-bid.”

Jubilant calls were made by London-based managers to rebel investors in New York and comrades at traditional institutional houses. By Monday morning when Deutsche Börse released its short statement citing shareholder pressure for its withdrawal, the City was awash with talk of the investor victory.

One institution said: “The hedge funds have done a marvellous job. No matter how we feel about companies, traditional managers simply cannot move as fast to achieve our aims. We were right behind (the hedge funds), but we couldn’t have done it without them.”

Werner Seifert, Deutsche Börse chief executive, was rather less enamoured. He and chairman Rolf Breuer are grandees in corporate Germany and unused to such brusque treatment at the hands of little-known finance boutiques. From the start, Seifert loudly dismissed shareholder demands, particularly from hedge funds — even though TCI, Atticus and Harris Associates were among his biggest investors.

Insiders said Seifert only ad-mitted that the shareholder rebellion had become a crisis when traditional houses such as Fidelity and Merrill Lynch said they would boycott his roadshow to sell the LSE bid.

Last week his thinly disguised contempt for the rebel investors seemed unchanged. He told reporters yet again that the funds that had halted the takeover were “very short-termist” and, this time, “not very welcome in Germany”.

David Slager of Atticus told The Sunday Times: “This attitude was absurd. Seifert was saying that shareholders should follow what the management want. This is wrong. The company belongs to shareholders. The management should do what shareholders want.”

Deutsche Börse’s humiliation could have implications for Euronext, the LSE’s other suitor. The same hedge funds dominate its share register.

Distrust of hedge funds remains widespread. Two weeks ago concerns over this opaque sector were sparked again by news that KL Financial, a $200m Florida fund, had stopped trading, pending an investigation into its investments.

Some say failures are not surprising given the rate at which the sector is growing — it is estimated there are now 9,000 hedge funds globally controlling $1,000 billion.

But the importance of hedge funds is based on more than their proliferation. Collectively the sector owns only about 3% of global assets. But it is what the managers, among the brightest people in finance, do with the assets that is giving them increasing influence and power.

Almost imperceptibly, the funds have become the lifeblood of investment banks. They also play a key role in corporate governance and shareholder activism. Now they are starting to invade the territory of private-equity and venture-capital companies by taking a pivotal role in mergers and acquisitions. Hedge funds could soon become the City’s new powerbrokers.

They account for as much as 50% of trading volumes, last year generating $25 billion — or an eighth of revenues — for global investment banks, according to a report by Credit Suisse First Boston.

They have brought about radical changes at British companies, sometimes by humiliating businesses that were frittering away investor capital.

But company executives are not the only people who are waking up to the power of hedge funds. City financial firms are doing the same. At a private-equity conference in Frankfurt last month David Rubenstein, founder of Carlyle, the buyout firm with $19 billion of assets under management, issued a stark warning: the threat of hedge funds becoming the dealmakers of the 21st century was real. They would use their capital resources and lucrative management incentive schemes to turn private- equity houses into little more than anachronisms.

Last month Highfields Capital, a Boston hedge fund, launched a $3.25 billion bid for an American electrical-goods retailer called Circuit City, in which it already owned a sizeable stake.

In Britain, mergers and acquisitions specialists said there was already talk of hedge funds leading a bid for an FTSE 100 company. Last week, J Sainsbury, MFI, Scottish & Newcastle, Stanley Leisure and Unilever were named as potential takeover targets.

Gareth Whiley, a partner at the mid-market private-equity firm PPM Ventures, said: “We cannot adopt the stance that the hedge funds do not know what they are doing — these are clever guys.”

As Slager of Atticus said: “We are not day traders. We are here for the long term. And, more important, so are our investors. We manage pension-fund mandates as well as high-net-worth money. We have a fiduciary duty to our investors to make them money. This is what we will fight to do.”

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