However, doing so would have been costly and technically difficult, would have increased moral hazard by relieving investors and counterparties of the responsibility for monitoring the funds, and likely would have reduced the social benefits of hedge funds by hampering the ability of their managers to respond quickly and flexibly to changing market conditions.
Thus, the sector is on a path towards a size and structure that will be sustainable in terms of the real economy’s needs. Yet to be clear, this can take many forms. We should not reduce this debate to a simple “we need fewer small banks” – more market players tend to be good for a functioning market. We should keep that in mind.