After the global financial crisis, systemic risk regulation has taken centre stage. Many consider hedge funds a potential threat to financial stability. Regulating hedge funds, however, is necessarily a transnational challenge because no national government alone can effectively control the systemic risks affecting its economy. This article takes the example of hedge funds for a case study of emerging transnational regulation. After an introduction to hedge funds and the reasons for regulating them, it considers the possible elements of a transnational regulatory regime for hedge funds: transnational industry self-regulation, including such induced by the government, regulatory competition between government regulators, and harmonisation of government regulation. The main conclusions are: self-regulation cannot substitute fully for government regulation in controlling systemic risks caused by hedge funds. Equally, regulatory competition tends to undercut systemic risk regulation. Effective transnational regulation can only be accomplished through harmonisation of government regulation. Such harmonisation is likely to arise if regulation is needed to control systemic risk in global financial markets.
[g]overnments thus remain indispensable for regulating hedge funds (if such regulation is considered desirable). Therefore, the specific constraints of multiple government regulators in dealing with transnational hedge fund activities gain importance. Analogously to the limits of self-regulation, regulatory competition among national jurisdictions cannot be trusted to provide for adequate regulation; it implies a slant towards laissez-faire even where stricter systemic risk regulation is called for. . . .[G]overnments have to coordinate their policies to reassert their power to regulate. (Id.).