This is a partial transcript from "Your World with Neil Cavuto," July 27, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: Are hedge funds (search) getting a bad name?

Let us ask Charles Gradante. He is the managing principal of the Hennessee Group, serving as an adviser to hedge fund investors. He is also the only nongovernmental official to testify on hedge funds before the SEC (search), the House, Senate and CFTC.

Good to have you.

CHARLES GRADANTE, MANAGING PRINCIPAL, HENNESSEE GROUP: Nice to be here, Neil.

CAVUTO: Everyone is waiting for the ax. It's going to happen. Bad things are going to happen.

(LAUGHTER)

CAVUTO: Because of guys like you.

GRADANTE: The bad hedge funds.

CAVUTO: Right.

GRADANTE: The big bad hedge funds. Overdone. Overdone.

You know, it's kind of cache to use hedge funds as an explanation for all of the wrongs in the market. The Nasdaq (search) bubble was blamed on hedge funds, the weakening in the dollar blamed on hedge funds, the bear market that began in 2000 blamed on hedge funds.

And, in fact, when you look at the '70s, we had the stock market drop 50 percent in the '70s. Gold went up 5,000 percent in the '70s. Oil went up 500 percent in the '70s. In the '80s, the dollar declined against the yen 50 percent, like it did against the euro recently. And we had the '87 crash and hedge funds weren't even around. I mean, there were a handful, but they were not a major player.

CAVUTO: But here's the rep that is different this time, Charles, that you guys are chasing these phenomena, so that, if they are to undo these markets, it will be because you guys gunned it.

GRADANTE: They have been saying that since long-term capital, and it hasn't happened. We went through a bear market and we haven't seen that happen.

The thing about long-term capital, which is not the poster child for hedge funds, is, it was a one-off event. And the banks that lent to long-term capital didn't do their duty...

(CROSSTALK)

CAVUTO: All right. But when that was in disarray and caused almost a global market panic, clearly, Alan Greenspan (search) sent signals: I will rescue you. I will rescue the markets.

(CROSSTALK)

GRADANTE: He was rescuing the banks. He could care less about long-term capital.

CAVUTO: Very good point. But there are a lot of powerful players behind hedge funds who might be exposed, right?

GRADANTE: Yes. But there are powerful players behind Orange County when they hedge their interest rate risks.

CAVUTO: Very good point.

GRADANTE: There are powerful players...

CAVUTO: If a big hedge fund today were about to go belly up, would, should the Fed intervene and rescue?

GRADANTE: The Fed should not intervene unless it affects the banking system, which long-term capital potentially could have. No one really knows, because the banks did not know their own balance sheet.

CAVUTO: But here's the thing that bugs people, Charles, that you guys are so secretive, not you individually. You know what I'm saying?

GRADANTE: Yes.

CAVUTO: Like, a lot of people don't know what hedge funds are, because you work like this order of the fine knights.

GRADANTE: Neil, hedge funds are no more secretive than your investment banks, which are the largest hedge funds on the street. Goldman Sachs, Lehman Brothers, Merrill Lynch, Citibank, they all have hedge funds in the belly of their proprietary trading business.

CAVUTO: And you use the example that you don't know a big firm's position on the dollar, and that is akin to what a hedge fund...

(CROSSTALK)

GRADANTE: We don't know if Citibank is long or short the dollar right now, or Lehman Brothers.

CAVUTO: Yes.

GRADANTE: We don't know what they are doing in gold or oil.

CAVUTO: But are you guys legalized insider training?

GRADANTE: No, definitely not.

CAVUTO: Are you guys legalized gambling?

GRADANTE: No. This is a limited partnership designed for the L.P.s to make money in a market, arbitrage mis-pricing.

CAVUTO: So, all this crepe hanging is overdone?

GRADANTE: As a matter of fact, hedge funds are value added to the market. And it definitely is overdone.

CAVUTO: OK.

GRADANTE: Now, that doesn't mean that, on the outliers, there isn't a cowboy here or there that gets into trouble. But guess what? That's the world we live in.

CAVUTO: All right.

GRADANTE: But, basically, most of the hedge funds are conservative strategies. Hedge funds have outperformed the S&P 500 since we have been monitoring and investing in...

(CROSSTALK)

CAVUTO: Not last year, though.

GRADANTE: Since '87.

CAVUTO: Not last year, though.

GRADANTE: Not last year, no.

CAVUTO: OK. All right.

GRADANTE: But since '87, with less volatility.

CAVUTO: OK.

GRADANTE: Less risk.

CAVUTO: Charles Gradante, thank you very much.

GRADANTE: Thank you.

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