Hedge funds... friends or foes?

Foreign affairs have a good article about the role of hedge funds. The article also points that even though hedge funds have received a lot of heat over the years they actually perform an important role with regards to liquidity and risk management. Here is a brief summary:

The massive growth of hedge funds has sparked warnings of instability and demands that the industry be regulated. But the fear of hedge funds is overblown, based on a misunderstanding of their role in the international Þnancial system. In reality, hedge funds do not increase risk; they manage it -- and policymakers, rather than clamping down, should make sure hedge funds have the tools to perform this function well

Yachts and hedge funds

From the economist:

THERE is an old Wall Street story that can be adapted for the modern world of hedge funds. A young hedge-fund trainee is taken to the harbour. “Here”, says his boss, “are the partners' yachts. And over there are the yachts of the bankers who lend to us.” The naive youth replies: “But where are the customers' yachts?”