Politicians and journalists often express concern about the size and influence of hedge funds. But a Congressional hearing with big-name hedge fund managers, including George Soros -- the same week that AIG’s (NYSE:AIG) bailout reaches $150 billion, and GE Capital (a unit of General Electric (NYSE:GE)) receives $139 billion in loan guarantees? That’s just a smokescreen.

It is banks and former broker-dealers (such as Citigroup (NYSE:C), Bear Stearns -- folded into JPMorgan Chase (NYSE:JPM) -- and the now-defunct Lehman Brothers) and a number of other financial institutions that have required the mobilization of enormous sums of taxpayer money. Hedge funds, however, are not among them. The only losses hedge funds have sustained will be borne by their investors -- all qualified individuals and institutions.

Who, me?
I haven’t even gotten into the huge responsibility of regulators and lawmakers themselves. It was members of Congress, for example, who inhibited the proper oversight of government-sponsored mortgage companies Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). Of course, it’s easier to put wealthy hedge fund managers on the stand than take a hard look in the mirror.

Joseph Schumpeter referred to capitalism as a process of creative destruction. Think of the hedge fund industry as a hyperkinetic form of capitalism. I talked to Guillaume Rambourg, who co-manages the $2.6 billion Gartmore AlphaGen Capella fund; he said he wouldn’t be surprised to see the number of long/short European equity funds fall from around 650 at the start of 2008, to half that number by the start of 2009!

Lightly regulated capitalism does its job in this industry, which has never been the object of a government bailout (that includes Long-Term Capital Management). Instead of grandstanding, lawmakers should focus on the real culprits in this crisis. And when it comes to hedge funds, they should be very careful while waving the blunt knife of regulation.

Hedge funds have had a rough time recently. Here are my thoughts on how to profit from hedge fund selling.

More Foolishness:

Lower equity prices will mean higher future returns for those who have the courage to invest in outstanding businesses now. The team at Motley Fool Inside Value can help you find those businesses. Their two latest stock picks were released yesterday -- check them out by taking a 30-day free trial now.

Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.