When Malcolm Glazer, a U.S. shopping-mall and sports-team tycoon, needed money to finance his takeover of British soccer club Manchester...

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When Malcolm Glazer, a U.S. shopping-mall and sports-team tycoon, needed money to finance his takeover of British soccer club Manchester United, part of the money came from banks.

But 275 million pounds, about $500 million, of the financing arranged by Glazer, owner of the NFL’s Tampa Bay Buccaneers, came directly from a group of three U.S. hedge funds: Citadel Investment Group, Perry Capital and Och-Ziff Capital Management.

Hedge funds are associated with short-term trading of public securities. But lately, some of the biggest are lending money, often for many years.

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In so doing, they are taking a cut of Wall Street’s core business of providing financing for takeovers, rescues and bankruptcy-protection proceedings. They also are taking Wall Street’s fees and services in arranging and distributing deals out of the equation.

Quietly, the hedge funds — lightly regulated pools of money that count institutions and wealthy individuals among investors — have become not only Wall Street’s best clients but also its most ferocious competitors.

“Wall Street is no longer where the most sophisticated capital or the most risk appetite resides,” says Robert Steel, a former vice chairman of Goldman Sachs. “Hedge funds take risk more quickly and with more understanding than Wall Street. They are good at picking businesses where they can receive excess returns for their capital.”

Recently, many large buyout firms say they have received offers from hedge funds to meet their financing needs.

For example, a few months ago, Don Gogel, chief executive of Clayton, Dubilier & Rice, says he received a visit from executives of Cerberus Capital Management. They were there to offer financing — not only for buyouts, but for bridge loans from the time Gogel’s firm buys a company to the time it is ready to sell its investment, perhaps years later.

So far, Gogel hasn’t taken up Cerberus on the offer, but he says he would consider doing so.

When Texas Pacific Group wanted to refinance its buyout of retailer J. Crew Group late last year, Black Canyon Capital, an entity largely funded by Los Angeles-based hedge fund Canyon Capital Advisors, provided a 10-year loan of $275 million. It did so partly because a co-founder of Black Canyon, Mark Lanigan, was so familiar with J. Crew.

“I had banked the company when I was still at” Donaldson, Lufkin & Jenrette, Lanigan recalls. “I knew what the company needed.”

And when Krispy Kreme Doughnuts needed money in April, both investment banks and hedge funds sent in proposals to the cash-strapped firm. Krispy Kreme accepted proposals for a $225 million refinancing from both Credit Suisse Group’s Credit Suisse First Boston and Silver Point Finance, of Greenwich, Conn., a $4 billion hedge fund.

Meanwhile, Arthur Newman, head of the advisory business at Blackstone Group, a financial firm with a large buyout and investment business, says he approaches potential customers among troubled companies only to find hedge funds have offered them rescue financing.

“They no longer need our advice or Wall Street’s money,” Newman says.

It isn’t exactly an intuitive development.

Cerberus, for example, has a $14 billion balance sheet. That is impressive for a hedge fund but hardly in the league of any investment bank, let alone the mighty universal banks.

But the size of that balance sheet is deceptive. Through the use of leverage, or borrowed money, a fund like Cerberus can actually deploy at least three or four times that sum — far more than most Wall Street trading desks.

There is an implicit irony in all this. Wall Street is lending hedge funds the money that then marginalizes Wall Street.

Since hedge funds aren’t publicly traded, they sometimes have more flexibility over the short or medium term when it comes to generating returns on their capital. And while they lack the big research and credit teams of Wall Street, they say they still have strong analytic capabilities and can commit capital more swiftly than other potential lenders.

Lending is just one facet of the way hedge funds, with ever-increasing pools of money, play a more important role in the capital markets. And in part, precisely because of their lack of transparency, there is concern about their ability to handle both the risks and obligations of lenders.

For one thing, an appetite for risk works well in benign stock and bond markets. But now, with markets more unsettled, that strategy may not be as effective.

And the deals that hedge funds target are the riskier ones, because that is where returns are greater.

Also, few hedge funds have diversified portfolios to reduce potentially harmful exposures. And for firms whose core business isn’t lending, but trading, there are frequently potential conflicts of interest.

In many cases, bank competitors say, hedge funds “loan to own.” In such cases, the lending is extended with the hope a company won’t be able to repay and the hedge fund becomes owner.

In other cases, the hedge fund may short, or bet against, more debt than it has lent, giving it a positive incentive to drive a company into bankruptcy.

Or, bank rivals say, if a hedge fund lends money to a public company, it may hedge its risk by shorting the company’s shares — betting against them by borrowing stock and selling it, hoping to replace it later at cut-down prices.

Former vice chairman

of Goldman Sachs