HEDGE funds are a favoured target for opprobrium. Their secretiveness and their ability to leverage huge amounts of money from a comparatively small capital base is often the cause of envy and anger. Malaysian Prime Minister Dr Mahathir Mohamad has castigated them, small investors have watched in wonder as they generate huge market swings, and even the International Monetary Fund - ultimately finding in their favour - carried out an unprecedented study into their role in the Asian financial crisis. In the past few months, another critic has been added to the list: base metals consumers, particularly in the nickel market. Largely traded in the London Metal Exchange (LME), cash nickel prices have been subjected to huge investor interest in the past few months. Like other base metals, such as copper, nickel has traditionally been traded by consumers or producers, who have sought to use forward contracts to hedge against future prices. If it cost a Canadian mining company US$6,000 per tonne to produce nickel, for example, it would seek to use forward contracts to ensure that in three months' time it could sell at that price or more, irrespective of whether the price fell or not. Now mining companies are complaining that it is almost impossible to carry out normal hedging activity, because the huge weight of money being pumped into the market by giant leveraged investment funds is distorting prices to the degree that it is becoming uneconomical for them to even produce. In particular, there has been bitter protest at the fact that nickel is now about 48 per cent off its peak. To blame, the critics say, is a massive build-up of short positions in the market taken out by the hedge funds. Gunter Kreissel, managing director of KMR Kreissel Metal Recycling, and management board member Tobias Kammer, contributed a leading article to the bible of the metal markets, Metal Bulletin , calling for urgent action to take hedge funds in hand. They said that the weak nickel prices did not reflect fundamentals, and that hedge funds were manipulating the prices, shorting both spot metal prices and the shares of mining companies. The authors wrote that present nickel prices, at some $4,430 per tonne, were well below production costs. As an answer, Mr Kreissel and Mr Kammer suggest making the LME regain its original status as a hedging instrument for consumers and producers. They say that like the oil market, nickel producers can reduce output to try to boost prices. Another suggestion is to create additional liquidity by constructing a new nickel contract for uncut cathodes, or even force the hedge funds to publicise their positions. On the face of it, these suggestions may appear to provide solutions, but in fact, they smack of market manipulation of the worst kind. Jim Lennon, base metals analyst at Macquarie Equities, agrees that prices have been weak, but that has simply been because demand has also been weak, due to a chronic oversupply in the market. He says that hedge funds do not seek to turn a market on its head, but rather exploit - and in doing so perhaps exacerbate - a trend that is already established in the market. It is difficult, if not impossible to battle against fundamentals, he says, and they presently indicate continuing oversupply well into 1999. There is, however, one other reason why the LME may be reluctant to keep hedge funds under control. It is likely such action would only scare them off, and in doing so lose the LME the valuable liquidity that hedge funds have brought to the market. That is something the LME is not likely to want to give up easily.