If foreign institutional investors (FIIs) are looked on in some market circles as fair-weather friends, a sub-sect of those moneybags in pinstripes is eliciting unbridled paranoia, utter contempt and undiluted fear in nooks and corners of Dalal Street. After all, these are the guys who are going when you think they're coming, the ogres responsible for bringing down economies (remember East Asia), who collapse under their own over-leveraged weight (a US hedge fund, Long Term Capital Management, took a hit of $4 billion in 1998), and who are generally considered even more volatile than John McEnroe once was.

The Securities & Exchange Board of India (SEBI) is mercifully for its part not as terrified of hedge funds. The watchdog is working out regulations to allow for direct entry of hedge funds into Indian markets, with of course the requisite checks and balances. Currently, hedge funds can't come in as FIIs and so open up sub-accounts (outside India) sponsored by registered FIIs. SEBI estimates that hedge funds accounted for 5 per cent of total FII assets for the year ended March 2004.

If hedge funds are feared-not just in India but in many global markets-it's not so much because they tend to go bust (or get busted) but simply because there's not much information available on them. That they often allegedly work in collusion, are outside the purview of disclosures required to be made by conventional funds, and that advisors to hedge funds pocket fat fees, may have something to do with the negative perception (including perhaps envy) surrounding these firms.

According to data put out by SEBI, global hedge funds had volumes of $750 billion as of 2003, and-here's the best part!-the 8,000-odd such funds yielded an impressive cumulative average growth rate of 24 per cent between 1988 and 2003. In five years, hedge fund assets could cross the $1 trillion-mark.

And we don't want a piece of that stash!

With a huge question mark hanging over FIIs inflows into emerging markets sustaining over the medium term-already in May FIIs had net sales of $800 million, and there's no reason why such outflows can't happen again in subsequent months-is it wise to continue to ignore an attractive source of much-needed liquidity? Hedge fund baiters can point to the misdeeds of hedge fund advisors in cases like LTCM, but by that yardstick the high-jinks of mutual funds in the US are scandalous enough to call for a blanket ban on foreign mutual funds into the country.

But of course such a ban won't serve much purpose. Rather, it's up to SEBI and the Association of Mutual Funds (AMFI) to ensure that regulations are in place to ensure that illegal activities like late trading and insider trading are curtailed in Indian funds. And that's exactly what SEBI and AMFI are doing. Similarly, SEBI has to put in place laws to prevent hedge funds from running riot in Indian markets.

Short-term, speculative trading today isn't just the purview of the hedge fund manger, what with get-rich-quick wannabes in Kolhapur or Rajkot staring into NSE terminals indulging in the same. Of course, the hedge funds' trading decisions will impact markets more than a Rs 10,000 small-town transaction, but then again it isn't as if these funds buy or sell on a whim or via a tip: Research is a given in this industry, as the pressure for this "rich-man's fund" to deliver is enormous. What's more, investors can look forward to another avenue for portfolio diversification within the equity ambit.

Clearly, being wary of hedge funds because of the dangers they come with is a risk-free approach that's in absolute contradiction to the spirit of equity markets, which by nature are all about risk and return. Greed-induced fraud is an intrinsic inevitability but there's always the criminal and civil rods to deal with scamsters. After all, it can't be considered only a patriotic right to manipulate and abuse markets!