One would think that the ongoing global uncertainty would be enough to give any hedge fund manager a headache.

One would think that the ongoing global uncertainty would be enough to give any hedge fund manager a headache. But add to this a potential renewed effort by European Union heavyweights Germany and France to impose more stringent regulation, and things might get out of hand.

The reason for this potential trigger is a recent clampdown on short selling (an activity closely associated with hedge funds) in Australia, which, experts believe, will lead to a renewed piling of pressure on hedge funds by some big EU member states.

Early last year, when the pressure was growing on hedge funds in the run-up to the G8 meeting, a number of forward-thinking managers in the UK and US came up with a voluntary code of conduct to maintain the balance and, perhaps, head off the threat of further regulation.

But the crisis in sub-prime lending that has now spread across the global credit market has added to the trouble. When the world is unstable and sentiment is negative, there is a lot of blame to spread - and unfortunately, hedge funds are much on the receiving end.

The demand for increased transparency is problematical for hedge fund managers, not for any sinister reason, but simply because the success of so many funds depends on the manager being able to keep his positions confidential.

Not to be able to do so would reduce the manager's ability to produce alpha, as other managers simply copied his strategy, and would also create the risk of other parties trading against short positions.

By imposing inappropriate regulatory measures to hedge funds, the entire essence of the fund itself could be lost.