Should hedge funds be regulated?

This paper is non-committal but essentially skeptical.  The authors make a few points:

1. Hedge fund customers are wealthy and sophisticated; there is no customer protection motive for regulating hedge funds.

2. Hedge funds serve some useful purposes, including private research, price discovery, and provision of liquidity.

3. Secrecy is the essence of hedge fund activity.  For that reason, the standard regulatory recipe of disclosure has limited applicability in this context.

4. There is not much evidence that hedge funds are destabilizing at the macro level, or involve significant levels of systematic financial risk.

I believe these views are likely correct.  The more important question is what is the best course of action — in terms of expected value – if they might be wrong.  Systematic risk is the real issue.

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