Highwaymen or heroes: should hedge funds be regulated?

The exponential growth of hedge funds, their role in financial crises in the 1990s, and examples of fraudulent behaviour have precipitated a heated debate over their regulatory status. The existing approaches of greater disclosure and activity restrictions appear too blunt to be effective and may stifle the benefits hedge funds can bring to the financial system. But, even the remote possibility of a systemic crisis weighs against no regulation. If reform is delayed until after a crisis it is likely to be politically influenced and sub-optimal. We argue that any reform should involve both the promotion of measures to reduce the likelihood of failure of a major hedge fund and crisis management procedures to address any fallout if this occurs.