Hedge fund managers Ken Griffin and Dan Loeb are backing Democratic presidential contender Barack Obama, while Thomas Steyer and Marc Lasry are betting on his rival, Hillary Clinton.

Prominent New York hedge fund managers Louis and Zack Bacon have put some of their money on Republican front-runner John McCain, the senator from Arizona.

As the battle for the White House heats up, the fast-growing $2 trillion hedge fund industry is flexing its political muscle and could play a crucial role in the race for campaign cash in the costliest U.S. election ever.

So far, Democrats look to benefit most.

Hedge funds -- large, loosely regulated pools of investment capital -- gave more generously to Democrats than Republicans in the 2004 presidential elections and in the 2006 congressional races that swept Democrats into a majority in U.S. Congress, according to campaign finance data.

This trend has continued in 2008. Already in the 2008 election cycle, hedge funds have favored Democrats three to one over Republicans, according to the Center for Responsive Politics, a nonpartisan campaign finance research group.

Industry analysts, lawyers and managers say Clinton may have an edge over Obama in a fierce battle for their cash.

I think hedge funds feel more comfortable with Hillary, who comes from a standpoint of raising money from New York financial institutions, said Columbia Law School professor and securities industry expert John Coffee.

Obama talks about change and when you are a hedge fund, you don't want any change to the ground rules.

Hedge fund industry analysts said Clinton, a New York senator, has already developed a relationship with the once-secretive industry, which is becoming more comfortable in pushing certain political agendas.

Many hedge fund managers are very socially minded people and they believe their wealth can make a difference in the world, said Denise Valentine, who focuses on hedge funds at financial consulting firm Aite Group.

They especially want to make changes in health care and education, and those causes dovetail nicely with Hillary Clinton, she added.

RISING DONATIONS

Last year hedge funds donated $3.2 billion to presidential candidates, more than twice the amount they gave in 2000.

Clinton took in $681,250. Steyer's Farallon Capital Management contributed $120,100 and Lasry's Avenue Capital Group, which also hired Clinton's daughter Chelsea, chipped in

$80,700.

Only Democratic Connecticut Sen. Christopher Dodd took in more than Clinton, raising $750,350. While that is a huge amount for an underdog presidential candidate, it is no surprise considering Dodd represents the hedge fund industry's unofficial home state and chairs the Senate Banking Committee.

Dodd dropped out of the race on January 3.

Among Republicans, John McCain raised $116,550 from hedge funds. The Bacon brothers' Moore Capital Capital Management donated $27,550.

But Moore Capital also likes Illinois Sen. Obama, who raised $552,374.

Obama has relied heavily on Ken Griffin's Chicago-based Citadel Investment Group, which put in $171,798. Moore Capital donated $22,700 to Obama while giving just $5,100 to Clinton.

While Obama's call for change might resonate with voters, it could frighten hedge fund managers, who hope Congress won't touch the current generous tax legislation and regulations for hedge and private equity funds.

Set up as partnerships, many hedge funds pay only a 15 percent capital gains tax, which some Democratic lawmakers may want to raise to the 35 percent that many corporations now pay.

New legislation could potentially impede hedge funds' ability to invest with the freedom they are used to, and so many of them are becoming more politically involved to make sure that doesn't happen, said Adam Sussman, a senior analyst at TABB Group of financial consultants.

People agree that Hillary is pro-business and that she's not coming down hard on us. With Obama, we aren't so sure yet, said a Boston-based hedge fund manager who asked not to be identified.

With Dodd and former New York Mayor Rudy Giuliani -- a Republican who raised $678,300 from hedge funds last year -- out of the race, there may now be a scramble to lay claim to their donors, industry analysts said.

Some sources of money could dry up for a while, said Massie Ritsch, a spokesman for the Center for Responsive Politics. But hedge fund firms could also become energized and back their bosses' new favorite candidates.

Large firms could play an especially powerful role. While federal finance laws limit personal contributions to $2,100, big firms potentially have hundreds of employees to make those contributions.

Big hedge fund managers often have a favorite candidate, and we've seen that at some of these firms employees saw good reason to support the boss's choice, Ritsch said.

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