Primary concern of government regulators is to prevent a repeat of a major market crash similar to that of 1929 which caused a depression. Even minor implosions of a hedge fund can conceivably trigger recessions and have a domino effect. Hedge funds have come under increased scrutiny nowadays due to some well-publicized and spectacular blowups despite resistance by fund managers to any form of regulation. The 2 most important newly-imposed provisions concern anti-fraud regulations and anti-money laundering regulations which were non-existent a few years ago. The collapse of LTCM ten years ago had a big psychological impact on investors. Foremost is the thinking they can continue using the same risk models and will be saved if they run into trouble again. Prominent investment bankers say the “weight of inertia” has prevented effective regulations as safeguards from being adopted.
The contrary view is that it is not good to rein in “healthy” financial risk taking and the markets’ resiliency will eventually rebound after someone finds value in them again. Any rescue by regulators is usually justified that everybody will suffer instead if no action is taken but the same kinds of mistakes are being repeated.