I was watching Will Hutton's Dispatches programme on bank failures last night, and it really (unintentionally) emphasised the point that it is impossible to generalise about hedge funds, much as many of us lefties like to. Bear Stearns was floored by its hedge funds' exposure to CDOs, as part of a big punt on subprime. Yet at the same time (and subsequently) there were hedge funds profiting from a wholly negative take on subprime.
I don't see how we can criticise 'hedge funds' as a group for their role in the crisis, given that there were diametrically opposed strategies out there (unless you consider all trading in relation to subprime to be inherently bad). It's simply too much of a generalisation to say what 'hedge funds' were up to since there was such a wide variety of activity across many different types of funds.
It's an old joke that hedge funds are a fee structure in search of an asset class, but it's got a lot of truth in it. The cartoony version that many lefties have of hedge funds (and I'm a recovering cartoonist myself here) is that they are inherently speculative and/or short-termist, and a threat to financial stability. But hasn't the crisis demonstrated somewhat that this view of hedge funds is overblown? It was the banks that really caused the problems in the end. Despite some hedge fund wipe-outs, did they really create the structural havoc that was expected by some?
Therefore in any reform response surely we've got to focus on strategies and behaviours that are problematic, rather than gunning for an asset class that is so broad as to make the definition almost meaningless.