New York Times – As Congress and the Securities and Exchange Commission consider tightening the reins on hedge funds, an article in the latest issue of Foreign Affairs is suggesting they should let them run free. While critics of these kinds of investment pools often portray them as cowboys who disrupt the markets when their risky bets go bad, Sebastian Mallaby argues they are nothing of the sort. Hedge funds are the good guys, he writes.
Hedge funds have flourished in recent years, with assets under management ballooning to more than $1 trillion since 1998. Yet Amaranth Advisors‘ $6.5 billion meltdown this fall has rekindled concerns about another spectacular collapse on the order of a Long-Term Capital Management. The relative secrecy of hedge funds can seem frightening. More pension funds are turning to hedge funds in an attempt climb out of their financial holes, prompting some lawmakers and regulators to express concern about retirees’ funds disappearing.
Mr. Mallaby, a columnist for The Washington Post, paints a different picture. Instead of threats, hedge funds promote liquidity and right the markets by exploiting (and thereby reducing) pricing discrepancies. They assume risk that would otherwise fall onto mainstream institutions like banks, promoting a more stable marketplace. And the risk of a massive hedge-fund collapse  what Mr. Mallaby describes as a disastrous domino effect that wipes out hundreds of funds making the same wrong bet  is highly unlikely. In short, he argues, hedge funds are the sorely misunderstood guardians of the modern market economy.
