Hedge funds, which control more than $2 trillion in assets, and when one includes leverage, substantially more than that, are an institution that has helped produce massive increases in trading volumes and financial transactions in the last decade.

Further, together with wealth management investment funds, private equity funds, and of course investment banks and brokers, these institutions form the bulk of the market's "shorter-term players" - - organizations that are likely to have an investment horizon that is shorter than the typical person's. They're also more-likely to use aggressive investment techniques and invest in high-risk instruments.

Few deny that the above institutions, particularly hedge funds, with their buying power and volumes, have increased market liquidity.

However, lately a growing chorus is beginning to question the ultimate impact of hedge funds, and comparable players. Namely, they're asking if hedge funds and their companions are distorting prices of commodities, stocks, and other investments.
Case study: oil

As a discussion point, the critics cite oil. As everyone knows, oil has more than doubled since January 2005 and is at near-record levels of $90-$95 per barrel.

Yet throughout oil's surge Saudi Arabia's Oil Minister Ali Al-Naimi has repeatedly said, "the price of oil does not reflect underlying fundamentals" and "the oil markets are well-supplied."

Those who view the oil market differently critique Al-Naimi by citing oil's Iraq War premium and the small safety cushion between oil production and consumption.

The war premium and modest safety cushion would seem to imply a tenuous oil framework, but as Al-Naimi's comments indicate, nowhere has an oil consuming nation failed to receive a major request for oil. Not in the U.S., or Europe, or Japan. Inventories have fallen below yearly norms, but there have been no spot shortages for oil. I.E. no region of the world has had to go without oil, due to lack of supply. Al-Naimi is right: the oil markets are well-supplied.

But yet the price hangs at $90 per barrel - - a price that suggests that much more serious conditions exist in the oil market. What could they be?

Some analysts revert to the "Iraq War premium" factor: that the Iraq War and concerns that Iran may attempt to block the Strait of Hormuz is supporting oil's elevated price. True, Iraq's current oil production is less than half its capacity, and Iran has made aggressive statements, but few military analysts believe that Iran is foolish enough to attempt to block the Strait of Hormuz, through which 20% of the world's oil supply passes.

Hedges in a row

If Al-Naimi is right, the oil market does not reflect underlying fundamentals, and institutional investors, led by hedge funds, in their search for return on investment and their choice of oil as that investment vehicle, have boosted - - artificially raised or distorted, if you will - - the value of oil. Oil's price is high not because of low supply or high demand, but because investors with a stake in it are artificially boosting its price, the theory asserts.

Further, if Al-Naimi is right that also suggests that at some point in the future - - possibly at the point where investors determine the investment returns on oil will not be large enough or that won't be larger than investments in other vehicles - - oil's price will drop substantially.

Oil Analysis: Initially, Oil Minister Al-Naimi's argument did not have many backers, but the lack of a large shortage anywhere in the globe, combined with oil's sustained elevated price in face of continuous supply, has given more analysts and economists pause to think. One way - - albeit a rough way - - to test the Al-Naimi thesis is to see how much oil drops after the Iraq War ends. Even assuming a $20 per barrel Iraq War/Middle East premium, if oil drops to the $60-range that would suggest a minor bubble in oil's price run-up to $100 per barrel.