George Soros - doyen of hedge fund managers - is known for his work in bringing education in capitalist methods and values to former Communist countries and more generally for his espousal of a wide range of liberal causes.

Michael Steinhardt, long retired from active trading, gives extensively to Jewish charities. Caxton Corp's Bruce Kovner is a major donor to the Juillard School. Paul Tudor Jones donates money to save the Everglades.

Less well publicized, however, were the involuntary donations Steinhardt and Kovner were forced to make to Uncle Sam for their less than charitable attempt in 1991 to corner a two-year Treasury note issue. The Department of Justice fined the duo $76m for their pains.

The buccaneering attitudes of hedge fund managers - and the supine approach sometimes adopted by the banks that lend to them - was exposed nowhere more poignantly than in the case of Long Term Capital Management. John Meriwether's bond arbitrage fund was forced to seek the help of the Fed in 1998 when it ran out of money.

Not only was Meriwether a very highly regarded arbitrageur, but the fund employed no less than two Nobel laureates in mathematics. It fell victim nonetheless to a classic liquidity squeeze brought on by an external shock - Russia defaulting on its sovereign debt.

A consortium of banks baled out of the fund, partly because of the threat a collapse would have posed to the global financial system. However, some investors felt the episode could have been better handled. Many bank executives involved in the bailout had some of their own money invested in the fund, introducing a subtle element of 'moral hazard' into the equation.

Curious as all this seems to many observers, it isn't the end of the story. Hedge funds are riddled with temptations for the weak and unscrupulous. There were five major frauds involving hedge funds in 2000, most revolving around the falsification of performance figures on which managers' bonuses depended. Another scandal involved a hedge fund manager, widespread stock manipulation and organized crime.

So it's fair to say that hedge funds have come a ways since they originated 50 years ago in the ideas of Alfred Winslow Jones. Jones ('the Jones nobody keeps up with', as a magazine headline had it at the time) was a Fortune journalist who hit on the deceptively simple idea of balancing buying undervalued stocks with selling short the most overvalued turkeys in the market.

This long-short style still represents the most common form of hedge fund. What's developed since then have been huge performance fees to managers and significant amounts of leverage, often used to juice up the mundane returns generated by stock and bond arbitrage. LTCM's leverage was reputed to be around the 28:1 mark.

And yet hedge funds retain their potent appeal, despite limited liquidity and a high minimum entry fee. In my book, Hedge Funds: The Courtesans of Capitalism, I call them the 'courtesans of capitalism': attractive, influential, rich in their own right but craving respectability, reserved for the wealthy, practicing more subtle and exciting techniques than their more humdrum sisters.

As big pension funds invest more in hedge funds (CalPERS recently announced a new program of investment in this area) so hedge funds will be forced to disclose more about what they do. The industry may be less exciting as a result.

But that won't be quite the end of the story. The unknown hedge funds are those that sit in the middle of big investment and money-center banks, in the shape of proprietary trading desks.

Prop traders, remunerated by a bonus structure that rewards success but doesn't necessarily penalize failure in straight financial terms, are an accident waiting to happen. Bank managers may not - as countless examples testify - quite understand what risks are being run in their name. The impact when trades go wrong is on depositors' money and shareholders' equity. Lest we should forget, this was precisely why the Glass-Steagall Act was instituted in 1933.

The current bear market, and future prop trading disasters in the wings, may make all of us wish that it were not quite the dead letter it has since become. And perhaps too, that bank traders possessed the disciplined approach that marks out the really successful courtesans of capitalism.

Go to Finance & Investments.