Hedge funds and their managers have been vilified in recent times for their high-risk activities and relative lack of regulatory oversight. A recurrent concern shared by market participants and regulators around the world is that the increasing size of the hedge fund industry coupled with potential agency problems, activist investment practices, and herding behavior may exacerbate financial instability. However, while it is frequently suggested that hedge funds are unregulated, they are in fact regulated to some degree in every country around the world.

It is important to consider...