Most hedge funds are too small to threaten the financial system. Over the past decade, something like 5,000 went bust, and not one significantly destabilised markets or required a taxpayer bail-out. Because they are small enough to fail, hedge funds represent an appealing alternative to too-big-to-fail behemoths. If the financial supervisors were to burden hedge funds with oversight and hamper their growth, it would reduce the amount of risk that they absorb, paradoxically making the financial system less stable.
Banks such as CitiGroup, brokers such as Bear Stearns and Lehman Brothers, home lenders such as Fannie Mae and Freddie Mac, insurers such as AIG, and money market funds run by giants such as Fidelity - all have failed or been bailed out. But the hedge fund industry has survived the test of 2008 far better than its rivals. The future of finance lies in the history of hedge funds.
Taken from:
An interview with the author Sebastian Mallaby you find here.
