Hedge funds are in the news lately, mostly in a negative way. They are almost completely unregulated, and with their enormous amount of leverage, they can wreck havoc on innocent targets. Many a company has been under attack through shorting or naked shorting, they can even attack whole countries.

Last week, Icelandic authorities accused four British hedge funds of attacking their banks and currency, and Icelandic authorities apparently were so serious that they threatened with a counter attack. This seems the stuff of Hollywood.

The Prime Minister of Iceland, Geir Haarde, said at a meeting of Nordic political leaders in Sweden on Wednesday: “It’s clear that there are people out there trying to make money at our expense, and we want to get them off our backs.”

The Central Bank has already asked the Icelandic Financial Services Authority to investigate whether or not investors had deliberately spread false rumours to the media in order to bring turmoil to the Icelandic financial markets.

Meanwhile the Central Bank raised its key interest rate to 15.5% on Thursday in order to protect the currency and control mounting inflation.

They even go as far as to intimidate university professors”

“Dr Richard Portes, professor in economics at the London Business School and President of the Centre for Economic Policy Research, was allegedly contacted by the hedge fund which urged the professor to consider his reputation when reporting on Iceland and Icelandic banks.

Dr Portes is the author of a number of influential reports on the financial situation in Iceland and has recently portrayed the Nordic country and its banks in a more positive light than many other foreign analysts and media outlets.

The hedge fund in question is one of the four foreign hedge funds that Sigurdur Einarsson, Chairman of Kaupthing Bank, has accused of instigating an attack on the Icelandic financial market and Icelandic banks.

“I quickly realised what was happening and decided to listen carefully and take notes,” Dr Portes said. He then contacted the FSAs in both the UK and Iceland to report the incident.” (source).

The Financial Times quoted an anonymous banker from Iceland who was invited by Bear Stearns(!) to a meeting in January in the bar of Hotel 101 in Reykjavik with a couple of other hedge funds with the purpose to discuss the “bizarre” state of the Icelandic economy.

All present decided to go short, and one described that opportunity as the “second coming of Christ”

The costs? Billions of dollars because interest rates had to include a greater risk premium.