I’ve found at least one good piece on them, by Rene Stulz, in the Spring 2007 Journal of Economic Perspectives. I learned or reaffirmed the following:
1. Hedge funds have existed since at least 1949.
2. Hedge funds exist because mutual funds do not deliver "complex investment strategies." In part this is because mutual funds are regulated.
3. The largest mutual fund is about six times larger than the largest hedge fund. Marketing constraints also encourage very large funds to adopt simpler and easier-to-explain strategies.
4. Investment advisors with fewer than 15 clients do not have to register with the SEC.
5. Regulations restrict the compensation of mutual fund advisors in various ways, typically requiring symmetric treatment of gains and losses (if a dollar of profit leads to a bonus, a dollar of loss must lead to a penalty). That is why mutual fund managers are compensated in proportion to the size of their funds, not their performance. This is not obviously efficient, and of course hedge funds pay for performance.
6. Hedge funds don’t have to disclose information to investors, other than by contractual agreement.
7. Diversification and redemption requirements make it harder for mutual funds to exploit some profit opportunities, or to hedge in particular manners.
8. The number of mutual funds that try to replicate hedge fund strategies is growing rapidly.
9. Available data on hedge fund returns are nearly worthless.
Overall I was struck by how much hedge fund activity is an artifact of regulations, and not necessarily beneficial regulations. Deregulating some aspects of mutual funds may be an alternative to regulation of hedge funds.