Investors are using a new tactic to pressure some of the country’s biggest companies. And the firms are fighting back.

The bets, called total return swaps, excite activists but terrify corporate managers. Hedge funds have used them in high-profile campaigns against the management of companies like CSX and Target, and they have quietly grown into a $1 trillion market. What makes swaps alarming (to firms) and alluring (to activists) is the possibility that they can be used to exert pressure on companies, in spite of the fact that they’re unregulated, carry no disclosure requirements, and are nearly impossible to track.

Think of them as private wagers on a firm’s stock price: A bank pays you if the price of a stock goes up; you pay the bank if the price goes down. The more the price changes, the more money changes hands. It’s like betting on a sporting event, except that in the case of swaps, you win more if your team scores more points and lose more if it scores fewer.

Who does this? Activists Carl Icahn and Nelson Peltz have bet on companies without buying their shares outright. Last Christmas Eve, investor Bill Ackman disclosed that he had used private contracts to gain “economic exposure” to more than 80 million shares of Target, or more than 12 percent of the company. He did so without buying Target shares. Instead, the exposure came from side bets placed on Target’s share price. Most recently, two hedge funds have bought swaps and pressured the management of the 180-year-old railroad CSX, landing both sides—and me—in court.

There are various reasons to purchase swaps. Some investors use them to buy into otherwise inaccessible markets, for example firms listed on foreign exchanges. Others use them to limit taxes on dividends or capital gains. Another benefit is leverage. For a swap based on $100 worth of stock, a bank might require that the investor pay just $10 up front.

But the reason swaps have become controversial is that they’re done in secret. Investors can use swaps to gain economic exposure to a company without disclosing their positions. Whereas shareholders trade in real-life stock markets, where it’s relatively easy to track their moves, swapholders are hidden in a virtual reality where disclosure rules don’t apply. Actual ownership of swap-related stock is negotiated privately between swapholders and banks, and neither side is obligated to buy actual shares or tell anyone about their swaps. Managers despise this secrecy; they want to know who has bet on their companies.

Swaps have been in the headlines recently as a result of a legal dispute between CSX and two hedge funds. The railroad firm sued the funds, claiming in court that they had illegally used swaps to pressure CSX, even though they initially didn’t own any of its stock.

Before the CSX dispute, investors had assumed that a rule requiring disclosure of share positions of 5 percent or more didn’t apply to swaps. After all, a swap was just a side bet, and swap­holders didn’t own shares. Nor did they enjoy the advantages of stock ownership, such as receiving dividends from the company or a right to vote. Although the Securities and Exchange Commission had not released a formal regulation for swaps, investors followed a related ruling that 5 percent positions in security futures, which resemble swaps, could remain secret. Even after the hedge funds in the CSX case had accumulated swaps amounting to side bets on 12 percent of CSX shares, they didn’t disclose their positions.