Trouble Getting a Loan? Try Your Local Hedge Fund

NY Times (NYSE:NYT) Dealbook reports this morning that hedge funds are stepping in to fill the void left by a banking sector (NYSE:XLF) that stopped handing out loans. After being denied a credit stream by a local bank, one Los Angeles based business, Rentech, sought out hedge fund managers who have since loaned the company over $100 million.

More from Dealbook, “The support [by hedge funds] is critical in a recovery characterized by high unemployment and anemic growth. These middle-market companies, which generate $6 trillion in revenue a year and employ 32 million people in the United States, are borrowing billions of dollars from the hedge funds for product development, strategic acquisitions and even day-to-day operations like payroll and utilities.”

With hedge funds entrenching themselves in the credit business, many have raised concerns with the questionable legal and ethical tactics involved in these finance deals. Are these “shadow banking” enterprises good for the economy? Hedge funds have been known to charge higher interest rates and demand more stake in collateral on loans, but according to Rentech CEO Hunt Ransbottom, for many small and medium-sized businesses there are few alternatives. “You have to take what’s available at the time,” said Ransbottom, adding “On the one hand, the cost of money is more expensive than what some businesses might be used to. On the other, if the money is not available, the cost is infinite.”

With the federal government cracking down on banks with legislative reforms such as Dodd-Frank, does the hedge fund loan market signify the rise of a kind of “black market” for credit? Given Jamie Dimon’s assault on Bernanke at the Fed. Chairman’s speech in Atlanta this week, leading bankers are clearly growing more and more frustrated with stingy limitations that are drowning their ability to extend credit.

Could the rise of shadow banking and hedge fund loans be a symptom of market backlash to the new reforms?