Do hedge funds have too much power?

A reader of my book, 2014: America’s Date with Destiny, writes:

“You don't seem to like the fact hedge funds command so much power. You even lament the fact they pose a risk to the financial system. Two points:

“1. Their power is given to them by free agents called investors. Who are we to question their collective decision process? It may be flawed, it may be wrong but it is what it is.

“2. If their power is excessive what can be said about the excessive power granted to governments? What gives legitimacy to governments other than being elected by a majority that is vastly clueless and by default of an average intellect?”

These are both provocative points that require thoughtful answers.  On the first point I’d respond by saying that while individual investors give hedge funds their power in the form of money, the question must be asked as to how reasonable it is to allow individuals to aggregate money power beyond a certain limit.  Is it fair and reasonable to allow fund managers to command billions of dollars – mostly from high-net-worth accredited investors – which in some cases gives them a lever to influence critical commodity markets?  In some cases these operations influence the prices of goods and services which everyone must purchase for survival (oil, gasoline, ag prices, etc.)  When did Americans ever give hedge funds a mandate for controlling their financial destinies? 

When a particularly powerful hedge fund manager, say a George Soros, decides to use his power to attack a sovereign currency (as Soros did with the British Pound), is that a fair use of money?  Should that be allowed simply because “free agents” granted them that power?  At some point I think it’s appropriate for citizens to ask the age-old question as to how much power an entity, such as a hedge fund, is allowed to accumulate.  The U.S. has a long-standing skepticism of corporate monopoly power and has at various times in history broken up monopolies.  When a hedge fund is able to exert the kind of power that influences the currency and/or the economy of a country, I think it’s reasonable to treat it as a type of monopoly power and attempt to curb it. 

On the second point my response would be that while government often tends toward excessive use of power, governments in the free world have their mandate by the assent of the people who pay them taxes, without which they couldn’t survive.  Hedge funds by contrast have accrued power by their own will, and in all too many cases, against the best interests of the people.  It is the power of government – supposedly “of the people, by the people, and for the people” – in a republic that allows hedge funds to exist in the first place.  Doesn’t it stand to reason then that hedge funds should be required not to act against the best interest of the people?