The arguments in favor of regulating hedge funds focus both on consumer protection and financial stability. ... At the same time, hedge funds provide substantial benefits to the financial system, in addition to the private benefits accruing to their investors and managers.

Why should hedge funds be regulated?

The systemic risk from hedge funds stems from the aftermath of a large funds collapse, not the ongoing regular trading activities of solvent funds. Therefore regulations should aim at containing the fallout from any such default so as to minimise market disruption.

Why are hedge funds not regulated?

As we've discussed, hedge funds are less well regulated than public listing because the types of investors have more funds which insulate them better from significant losses. These hedge funds can participate in riskier behaviors that aren't available to mutual funds or index funds.