(Fortune Magazine) -- In September, when Amaranth Advisors cratered after losing billions on bad natural-gas bets and Pirate Capital became the subject of an SEC investigation, other Connecticut hedge fund managers grew nervous that they would become a target for a local politician looking to steal a few moves from New York State attorney general Eliot Spitzer. Connecticut is home to an estimated $250 billion of the $1.2 trillion under management in hedge funds, according to Chicago's Hedge Fund Research.

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Connecticut's attorney general, Richard Blumenthal, who bears a passing physical resemblance to Spitzer, said on Sept. 19, "The facts about mammoth losses by Amaranth offer additional powerful and compelling evidence about the need to reform disclosure and oversight requirements [for hedge funds]." And he has convened a Hedge Fund Task Force that could lead to a larger investigation.

"We don't have a horseshoe-shaped table with nameplates," he told Fortune during an interview in his wood-paneled office in Hartford. Instead he's had to cobble together an informal group of hedge fund managers that he can sound out individually (and clandestinely) because these financiers prize secrecy as much as the characters do in the Robert Ludlum novels they read on their G5s to St. Barts. "The meetings are more likely to be in one of their offices or over a cup of coffee at the end of the day." Which is something the 60-year-old father of four can easily swing, as he counts a number of hedgies among his neighbors in Greenwich.

His preferred solution for dealing with the "regulatory black hole" surrounding funds would be federal oversight. Among the ideas he's also kicking around are an increase in the minimum net worth required for private investors to participate in funds and more protection for whistleblowers.

Blumenthal has considered running for higher office. He sports an impressive résumé - Harvard undergraduate, Nixon administration, Yale Law School, Supreme Court clerk, U.S. Attorney at 31 - but currently he's focused on getting reelected this November.

It is unclear how hedge fund abuse would play as a political issue. "These sorts of crusades by state AGs tend to be effective politically when a lot of little people are harmed by reckless big people," says William Galston, who served as deputy assistant for domestic policy to President Clinton. "Here you have big people being harmed by other big people."

That might be true for now, but if a fund implosion wreaks havoc on pensions, defending millionaires against billionaires might become Blumenthal's great populist issue.

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Shrugging off Amaranth: Despite the meltdown of a major hedge fund, it's business as usual -- and that could set the market up for a bigger blowup, says Fortune's Andy Serwer.