THERE is, as any socialite will affirm, only one thing worse than being talked about. And that is not being talked about.

Managers of hedge funds, the powerful band of investors that have grown quickly in importance over the past five years, would prefer to operate without being talked about. Many believe that careless talk will suck the lifeblood from this vibrant and valuable new constituency of capital providers.

Words must be had, however, about the role being played by hedge funds. The two-day special investigation into the industry undertaken by The Times and concluded today, shows how far the hedge fund industry has developed. Since the amount of money invested in the so-called alternative asset class now tops $1 trillion (£540 billion), the industry must expect to be talked about with increasing regularity.

Hector Sants is the man who would be in charge of hedge fund regulation at the the Financial Services Authority if there was was any regulation.

It would be all too easy for a regulator in Mr Sants’s position to pander to the public fears about the dangers of hedge fund investment and introduce rules that would regulate the industry out of existence. Worse, the wrong kind of regulation will chase hedge funds to the margins of global finance. Offshore and beyond the reach of sensible policing, hedge funds could wreak havoc.

William Donaldson, Sants’s SEC counterpart on the other side of the pond, is converting words into deeds. New year changes will see any fund with $25 million or more under management obliged to post results through the watchdog for all the world to see.

Alan Greenspan, the chairman of the US Federal Reserve, and the US Chambers of Commerce form two strands of an unlikely alliance opposed to change.

Dr Greenspan thinks hedge funds, as currently constituted, are an essential mechanism in the way financial markets absorb shocks. The US Chambers of Commerce, meanwhile, fear that regulation will prompt hedge funds to withdraw their capital. And that could have nasty knock-on effects on employment, the provision of goods and services, and the creation of wealth.

These concerns, along with many others, are perfectly valid. The wings of hedge funds should not be clipped. At the same time, however, hedge funds should be obliged to disclose more information about themselves.

When the owners of hedge fund capital were mostly rich individuals, disclosure was merely preferable. These investors, after all, can look out for themsleves. If they want to take pot shots in the dark that is their lookout.

Now the hedge fund asset class is moving into the mainstream, greater discloure is essential. The debate about distribution direct to retail investors, prompted by EU directives, is a red herring. Enhanced disclosure on the Donaldson model is required because pension funds are investing in volume in the alternative asset class. Since private individuals are the ultimate owners of pension fund capital, the hedge fund investment methods need to be open to public scrutiny.

Far from undermining the ability of hedge funds to generate returns, public scrutiny may enable them to sustain positive progress over the long term. In any event, it would be a mistake to see hedge funds as being wholly different from conventionally constituted investment funds. The tactics may differ, especailly in regard to borrowing and short selling. But all are, or should be, in exactly the same profit-seeking game. If hedge funds are in the same game as conventional funds, the same rules should apply. This, incidentally, goes for private equity funds too.

The disinfectant that is sunshine will also reduce the risk that one firm will ruin the reputation of an increasingly valuable industry. If disaster strikes, ensuing regulation will be harder to bear than the disclosure that now seems fit.

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