The fund managers suggested to MPs that short-selling on UK banks merely reflected the poor state of the firms' balance sheets.
Hedge fund bosses defended their investment practices to MPs in a Treasury Select Committee hearing yesterday.
The high-profile "hedgies" present at the meeting included Chris Hohn of The Children's Investment Fund, Stephen Zimmerman of NewSmith Capital Partners, Paul Marshall of Marshall Wace and Douglas Shaw of BlackRock.
Hedge funds - which generally operate as high-end investment vehicles for wealthy clients only - have stoked controversy over recent times, mainly due to the fact that they commonly "short sell" stocks.
The practice of short selling, or "shorting", essentially consists of a negative bet on a share price's future performance by an investor - who stands to make money if the stock falls in value. Hedge funds stood accused by some observers of "shorting" attacks on Britain's credit crisis-hit banking sector last summer, leading to a collapse in the share value of HBOS and forcing the firm into a merger with Lloyds TSB.
The fund managers were seen as "spivs" who made money out of others' misfortune by the public, committee chairman John McFall MP said at the hearing. He added that the funds themselves might be destabilising banks and that the sector suffered from bad public relations.
However, the fund managers strongly defended their actions at the committee hearing, saying that they merely reflected the parlous state of the UK banking sector. "Blaming the hedge funds for the banking crisis is like blaming the passengers in a bus crash," Mr Marshall commented.
Last week, hedge funds were again blamed for a fall in Barclays stocks, with some of the biggest price movements coinciding with the end of a partial short selling ban from the Financial Services Authority. The arrest of US fund manager Bernard Madoff and the latest revelation that top hedgie John Paulson's firm made a profit of over £270 million from short selling RBS stock prior to its collapse in value last week have also hit the headlines recently.
