“Hedge funds have always been prized by investors for their secrecy as well as for their outsize returns,” writes Gregory Zuckerman in today’s Wall Street Journal.

“But since the September terrorist attacks, that advantage may have turned into a liability for hedge-fund managers.”

“Worried that they may be unwittingly investing or laundering money for terrorists or other illegal groups, hedge funds in recent weeks have begun to overhaul their operations to root out anonymous investors.”

“The efforts, representing a significant shift for the $408 billion hedge-fund industry, come as the Federal Bureau of Investigation is examining whether any hedge funds invested money for terrorist groups connected to the Sept. 11 attacks. Hedge funds are lightly regulated investment vehicles, mainly for the wealthy, that can make big bets using leverage, or borrowed money.”

“The industry changes are intended, in part, to prepare for further scrutiny by regulators and legal authorities, who have begun to focus on possible money laundering in the securities business.”

“For the first time, some U.S. and offshore hedge funds are warning anonymous investors, and those that represent them, that their money will be returned unless they provide detailed information about who they are and where their money came from. Other hedge funds are developing ways to screen future investors.”

” ‘We’ve been asked additional questions about who our investors are, and it’s not just altruistic curiosity,’ says Evan Roth, a partner at BBR Partners LLC, a $600 million firm that invests for wealthy clients in various hedge funds. ‘Hedge-fund managers are feeling pressure to know their clients a little better. There’s fear that someone on the most-wanted list could turn out to be one of their investors.’ “