Hedge funds hold as much as a quarter of the equity of Germany's largest companies, according to top investment bankers, reflecting growing interest among foreign investors in betting on economic restructuring in the run-up to a general election on September 18.

The revelation will intensify controversy in Germany over hedge funds following the overturning of strategy and ousting of management orchestrated this year at Deutsche Börse, the German stock exchange group.

Christian Meissner, co-head of investment banking at Lehman Brothers in Germany, said: "Hedge funds probably have an average stake of more than 25 per cent in German blue-chip companies. The situation has changed dramatically in recent years."

Alex Dibelius, head of Goldman Sachs in Germany, said hedge funds held 15-20 per cent of the Dax30 index of blue-chip stocks.

Bankers said the level of hedge fund holdings was not greatly different from other European economies, but had increased in recent months as investors saw German equities as undervalued and thought the upcoming general election later this month could lead to a rise in stock markets.

Since chancellor Gerhard Schröder called the elections in May, the Dax has risen by more than 10 per cent, underpinned by hedge fund money.

"Germany is not being singled out for attack," said Heidi Zatlukal, managing director in prime brokerage at Morgan Stanley.

"It's just that the market cycle is right." The global hedge fund market manages assets estimated by US consultancy Hedge Fund Research at $1,100bn. European investments account for about a quarter of that.

The plethora of inflows and limited opportunities have led to a growing diversion of hedge fund money into equity holdings.