One could argue that the one thing hedge funds managers crave is an edge. They need something that others don't have. But finding that extra something--the secret sauce, so to speak--isn't easy.

That explains in some ways the rise of algorithmic trading and high-frequency trading. Funds can always claim they have a unique technology that differentiates them from the field--their edge.

To get this edge in a nonalgorithmic way is much tougher. Good investment ideas are harder to come by. Reg FD has made it more difficult to get info from insiders. And standard sell-side research seems generic and too widely distributed.

So, what do you do? Some have turned to expert networks, which has led us to this point. The insider trading investigation has pinpointed the extremes to which some will go to in the guise of research. This is not to taint the entire expert network approach. But it can be abused, and in the end this investigation may help separate legitimate firms from nonlegitimate firms.

How will hedge funds get their edge going forward? More will flock to technology. Others will struggle. A level playing field is hard for some funds to play on.

For more:
- here's an update from the New York Times

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