Unrestrained hedge funds need oversight.

ANOTHER day, another hedge fund finds itself cast to the wolves. The other week, Edward Strafaci, formerly an executive vice president of Lipper Holdings LLC, was charged in the U.S. with securities fraud. The allegation was that he overstated the value of two hedge funds by hundreds of millions of dollars.

One bad apple doesn't make for a rotten barrel, but Strafaci is just the latest in a whole series of scandals to hit the industry, causing closer scrutiny of fund transactions.

A couple of days earlier, another former hedge fund manager, Burton G. Friedlander, was indicted on charges of inflating and misrepresenting the value of his funds. Meanwhile, New York State Attorney General Eliot Spitzer said this month that he's expanding his probe into the trading of mutual funds to determine whether hedge funds and brokers were conducting improper transactions.

The Securities and Exchange Commission brought 12 cases against hedge funds in 2002, compared with seven in 2001 and six in 2000. That's one kind of "out-performance" that hedge-fund managers aren't going to trumpet in their sales brochures.

The popular image of hedge funds as a collection of sharks chewing their way through all the other fish in the ocean is starting to look pretty accurate. Amid such a wave of scandal, is tighter regulation now inevitable?

So far, the big players in the hedge fund industry have been opposing regulation. They need to think hard about whether that is the right strategy. Hedge funds have turned from a cottage industry into a big business. But although they have made the switch from cottage to skyscraper in terms of size, they have yet to make it in terms of attitude. This is a big industry that still thinks and acts like a small one. Most are private, and most base themselves in offshore centers to keep their affairs secret. They like regulation even less. After the SEC put out proposals to register hedge funds earlier this year, the Managed Funds Association, the main trade body for the industry, put out a response saying there is "currently sufficient regulatory oversight of the hedge fund industry."

The line from the industry: We are private, unregulated investments for very rich people, and we'd like to keep it that way, thank you.

That's understandable. The point of hedge funds has been that they are lightly regulated. It allows them to come up with trading strategies to beat the market. And it allows them to market their funds in innovative ways.

Unfortunately, it's also a mistake. The regulators are not going to go away. SEC Chairman William Donaldson said at a Washington press conference in September, "The commission needs to have a means of examining hedge fund advisers and monitoring their operations." The funds can either work with them or against them.

So many new hedge funds have been launched, some unscrupulous characters were bound to be drawn into the business. Hedge funds have been the gold rush of this decade--and gold rushes always attract sharp operators as well as honest prospectors.

At the same time, the secrecy of the funds' operation and the complexity of trading strategies make them wide open to abuse. When a hedge-fund manager collects a 20 percent performance fee on any gains made by the fund, only a saint would not be tempted to tweak the numbers.

Arguing that the industry doesn't need regulation is not going to work. Neither will retreating further and further into offshore tax havens. Better to come up with some form of self-regulation, and make it stick. Or to come up with some of its rules and regulations, which can then be passed on to the regulators worldwide.

Hedge funds should start cleaning up their industry. Otherwise, someone else will wash it clean for them--and they won't like it.

Matthew Lynn is a columnist with Bloomberg News.