Le·gal In·sur·rec·tion

"Myth: The hedge fund industry’s tendency to take excessive risks, combined with a lack of regulation, was an important cause of the financial crisis.

Fact: Not only did hedge funds not precipitate the financial crisis, they did nothing to exacerbate it. If anything, hedge funds have helped the economy to recover more quickly.

It is a fact that hedge funds are not as heavily regulated as other financial institutions. Also, they are not required to register with investment authorities or report on their activities. As a result, it is often alleged that hedge funds played a role in the emergence of the credit crisis, contributing to volatility through short-selling and by selling shares as a result of de-leveraging and redemptions. ... The data, however, does not support such theories. While hedge funds have often seen greater payoffs than the larger financial industry, they have done so while taking fewer risks.

McKinsey Global Institute research shows, for instance, that a significant portion of hedge funds have delivered higher and less volatile returns than investments in public equities and bonds over time, including during the financial crisis. ... McKinsey also found that since 1990 investors in hedge funds have earned higher returns than investors whose portfolios contain only equities and bonds. ... More importantly, hedge funds fared relatively better during the financial crisis than other firms in the industry. In 2008, as losses from the U.S. mortgage market turned into an international financial crisis, global equities dropped 42 percent. Yet hedge funds suffered worldwide losses of just 27 percent."