Argentina's president, Cristina Fernndez 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.
(Read more: As Stocks Fall, Some Hedge Funds Outperform)
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.