Recent events contradict the theory that hedge funds are a threat to the stability of financial markets. In fact, they have proved their usefulness in containing damage and easing market fallouts.
Take the sub-prime market. Bear Stearns is dominating headlines after two of its hedge funds got caught out on sub-prime mortgage bets and lost a not insignificant amount of money. But how much have other hedge funds that have been shorting the ABX or selling sub-prime bonds been making this year? Probably as much as Bear Stearns has lost, if not more.
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