Hedge Funds Stride the Stage of World Affairs ARGENTINA'S president, Cristina Fernández de Kirchner, was re-elected with a huge margin last year, leaving her political opponents fractured and demoralized. But in recent months, she has found herself locked in battle with a determined adversary who may outmaneuver her. Her opponent is not a participant in Argentina's domestic political scene. Rather, he is Paul Singer, a soft-spoken New York hedge fund manager. Through one of his funds, Mr. Singer is fighting in United States courts to press Argentina to pay up on some defaulted bonds. Mrs. Kirchner has refused. Mr. Singer may be deploying arcane legal strategies thousands of miles from Argentina, but his tactics are dominating the nation's political discourse. "This has been on the front page every day in Argentina," said Maria Victoria Murillo, a professor of political science and international affairs at Columbia University. In other words, a hedge fund has become an important political player in a democracy of 41 million people. With the right idea at the right time, and with the requisite financial firepower, hedge fund investors can exert significant political and economic influence. That may even prompt political scientists and economists to consider analyzing hedge funds the way they do trade unions and political parties. The ability of hedge funds to act as decisive change agents dates to one momentous trade: George Soros's bet against the British pound in 1992. At the time, the British government had tied the value of the pound to that of other European currencies. Many people contended that the pound's exchange rate was too high in this arrangement and was weighing on the British economy. Mr. Soros's fund wagered that the government would ultimately have to let the pound fall in value, prompting the fund to sell billions of pounds and buy other European currencies. The selling pressure was too much for the British government, and the pound left the currency arrangement. The day it dropped out was known as Black Wednesday. When the dust settled, some politicians saw Mr. Soros's actions in a positive light. They said the pound's exit allowed the British economy to flourish. The impact of Mr. Soros's trades may have been even more far-reaching. Britain's departure from the arrangement influenced its decision not to join the European single currency, according to Norman Lamont, Britain's chancellor of the Exchequer at the time. "After Black Wednesday, it was politically impossible for any government, Conservative or Labour, to join the euro," Mr. Lamont wrote last year in The Daily Telegraph. After the success of his pound wager, Mr. Soros's fund focused on Asian currencies. They were vulnerable because, like the pound, their value was fixed in a way that could create unsustainable economic imbalances. The bets by Mr. Soros and others forced some countries to abandon the rigid approach to managing currencies, said Sebastian Mallaby, author of "More Money Than God: Hedge Funds and the Making of a New Elite." Since then, developing nations have mostly avoided fixed currency arrangements, a choice that has generally served their economies well. "The upshot was that emerging markets broadly adopted flexible exchange-rate regimes," Mr. Mallaby said. Hedge funds never make bets as a selfless way to free nations from suffocating currency regimes. And those regimes might have collapsed anyway. But the hedge funds probably hastened their demise, leading to relief sooner rather than later. Hedge fund actions also contributed to a landmark legislative change in the United States a decade ago. Kynikos Associates and other hedge funds had doubts about Enron's books and were betting that its shares would decline. Eventually, fraud was exposed, and Enron, an energy trading company, went bankrupt in 2001. The company's collapse, with the crash of other fraudulent businesses, helped create the political climate for an overhaul of how companies report their financial condition. A result was the Sarbanes-Oxley Act of 2002. It is possible, even likely, that something like Sarbanes-Oxley would have developed anyway. But the hedge funds' ability to pick up on the fraud played an important role in shaming the main players. Auditors, regulators and banks largely missed Enron's skulduggery, underscoring the need for big changes. "I can't think of one major financial fraud in the United States in the last 10 years that was uncovered by a major brokerage house analyst or an outside accounting firm," James S. Chanos, founder of Kynikos, said in testimony before Congress soon after Enron's collapse. Hedge funds also played an early role in the housing bust, which affected millions of people and led to deep societal changes. Managers like Michael Burry of Scion Capital and John Paulson saw the shakiness of the housing market well before regulators, politicians and banks did. While house prices would have collapsed without hedge funds, the funds helped lead to the crash. In particular, their bearish housing bets helped convince Wall Street, a critical part of the mortgage machine, that the good times were ending. As early as 2005, Mr. Burry pestered investment banks for ways of betting against housing, according to "The Big Short: Inside the Doomsday Machine," by Michael Lewis. Eventually, the banks provided the financial instruments that allowed Mr. Burry to place the bearish trades. Soon, firms like Deutsche Bank and Goldman Sachs were betting heavily against housing in a similar way. Once the establishment started to turn against subprime mortgages, the game was up. Again, hedge funds helped end a bubble earlier and clear out excesses. Again, their prescience shamed those who should have seen the trouble brewing, fueling the postcrisis overhaul. But funds' efforts are often frustrated, and their antagonistic actions can backfire. For example, Mr. Singer's lawsuits may actually be making Mrs. Kirchner more popular, some specialists in Argentine politics said. "This is a beautiful thing for her," said Ms. Murillo, the Columbia professor. It's a unifying cause. Hedge funds may now think twice before taking on a government in the same way. Also, some markets are so big that funds may struggle to gain sway, especially if other investors do not share their theories. J. Kyle Bass, managing partner of Hayman Capital Management, is outspokenly gloomy about Japan, saying its government debt levels may soon become overwhelming. But he says his fund is not a meaningful catalyst. "I am a very small asset manager," he said. When there's a quadrillion yen of debt outstanding, it's nonsense to think I can have an influence. Now, hedge funds can also be outgunned by government entities aiming to shore up markets. Since the financial crisis in 2008, the world's central banks have shown a willingness to print trillions of dollars to support financial assets. This makes it much harder for some bearish bets to work. Hedge funds betting on the collapse of the euro have had a hard time since the European Central Bank stepped up its support in September, agreeing to buy government bonds of stressed countries. In many ways, it looks as if central banks will be able to dictate market prices for a long time, which might deter hedge funds from trying to upset the apple cart. After all, central banks can effectively print money to protect the prices of assets singled out by funds. But Mr. Bass said he was not convinced that central banks could maintain their support indefinitely. "They are not allowing natural forces to react in the marketplace," he said. No one's willing to say, 'Maybe central banks can't fix it.'