Academics and New York University's Stern School of Business and York University's Schulich School of Business in Toronto have an upcoming article in the Journal of Financial Economics that looks at the lending practices of hedge funds to publicly traded corporations.
The paper finds that hedge funds are either more adept at asking for balance sheet data than banks, and therefore able to see potential failures in companies, or are shorting the companies themselves. The bottom line is, the professors found a 74.8% increase in short sale volume in the five days ahead of annoucing a loan, compared with shorting in the 60 days prior.
Money Management Executive's take: Hedge funds are masters of black boxes and inside information. There may be nothing illegal at all about this practice, unless it turns out that the funds are manipulating the information to their advantage.