The biggest funds? Banks.

I've only just had a chance to have a read through Friday's Economist. Buttonwood reckons investors in private equity firms and hedgefunds are being strung along. Point in case: pension funds, who on the one hand are suffering in aggressive private equity buyouts and on the other, are paying high premiums to invest in the very private equity industry which so damages them.

Pension funds are suffering. Though not, I suspect, as much as others may do in the future. The real patsies in this game of liar's poker, are going to be the banks. At the moment banks are sitting comfortably - even though they have lost out in the primary loan market, the fees which come from dealing with hedge funds are very lucrative.

But banks are losing touch...

The division between banks and hedge funds is becoming artificial. Look at Alpha magazine's list of the top six funds. As the NYT Dealbook points out, the biggest are banks. Traditionally, of course, it's the hedge funds that provide so much liquidity in the market. They're risk takers: creative, flexible and willing to swallow the market's more toxic products to spin a quick buck. Should banks be doing the same?

For are start, the banks are not as good at it as the funds are.

But more worrying still, the banks are the ones loosening covenants and introducing more risk into the market, convincing themselves that they wont be holding any of it anyway. And yet their involvement in secondary markets is huge, try as they do to ape the funds. Imitation may well be the sincerest form of flattery, but the banks seem blind to what they're exposing themselves to. That, or they just don't care.

Banks have survived financial crises in the past for one good reason: their market positions were small enough to be quickly liquidated when trouble hit one of the big funds. They could get out, while the funds were trapped by their own huge bets. That obviously wouldnt be the case anymore...