They have stimulated an extraordinary amount of financial innovation in recent years; and, using many of these new financial tools, they have greatly enhanced the liquidity, efficiency, and risk-sharing capabilities of our financial system. Regulatory oversight of hedge funds is relatively light.
Because hedge funds deal with highly sophisticated counterparties and investors, and because they have no claims on the federal safety net, the light regulatory touch seems largely justified. However, the growing market share of hedge funds has raised concerns about possible systemic risk.