Do you want to hedge the risk that government will overstep?

For once I agree 100% with Sebastian Mallaby when he’s discussing economics and finance. Consider:

Modern societies worship innovation. When tech wizards get rich by founding Facebook or YouTube, people tend to celebrate. But this healthy admiration for success is subject to exceptions. When a different species of tech wizard gets rich by founding a hedge fund, the reaction is ambivalent — even though hedge funds contribute to the success of the economy as surely as tech firms.

Last week was fairly typical. The European Central Bank called for new regulation of hedge funds, including American ones. Germany’s government declared that hedge fund oversight would be on the agenda when it hosts next year’s Group of Eight meetings. Not to be outdone, the U.S. Securities and Exchange Commission proposed a rule that would bar all but the wealthiest 1.3 percent of households from investing in these demon vehicles.

How to explain all this suspicion? Hedge funds are simply pools of money whose managers are paid according to performance. This system of rewards is no more sinister than the patent system, which spurs inventors with the prospect of fabulous profits. Like intellectual property laws, hedge fund performance fees have created some impressive fortunes. Like intellectual property laws, they have inspired innovation, too.

His analysis is presented well. With over-intrusive government meddling in personal investing decisions, the government might as well mandate a “mutual funds only” policy for individuals. It would be just as rational, which is to say not at all. Oversight is important, as the history of finance and business in America shows, but I can just as easily lose all of my money in my business or in Las Vegas as I can by making investment decisions. Full disclosure, yes. Paternalistic protection, no.