David Skeel writing in Legal Affairs has a skeptical take on the how hedge funds are currently operating. Included is a good overview of the history of hedge funds and the legal environment in which they operate. Skeel is fearful that continued hedge fund abuses will undermine support for free capital markets:
Unfortunately, as each hedge fund trick is exposed and, in some cases, eliminated, the pressure to find other ways to cheat will grow, because the funds are expected to give investors rates of return so high that they are difficult to achieve without cheating. The new registration requirement is a start, but it is not clear that simply learning about the names, holdings, and general strategies of 8,000 hedge funds will allow the SEC to police them. As long as the pressure to take unreasonable risks and to show outsized returns continues, the basic integrity of the markets, and the investments of millions of Americans who think they have nothing to do with hedge funds, will be in danger.
Thanks to ProfBainbridge.com for the link.