I would add to his proposed regulation ideas the concept that, since hedge funds in some ways function as banks — taking clients’ liquid, short-term money and investing it into illiquid, long-term assets — there is a concern that investors might collectively pull back on the funds, as they did in 2007, and destabilize the entire financial system.

The concern for breakdowns in markets and institutions (along with more general anti-fraud protections) was the foundation for 20th century banking regulation. That stabilization regime failed as banks shifted from insured, deposits-based liabilities, and one would presume that analogous regulation will be sought for other banking and banking-like situations.

For example, a money market fund that sets a $1 NAV is acting VERY MUCH like a bank; witness the single-afternoon, > $1 Trillion run last September as evidence that markets alone are capable of causing utter failure in a rush for the exits. That Dr. Ibbotson recognizes the high costs of failure, but does not justify a reason for inaction, is curious.