With the troubled hedge fund Amaranth now cutting 60 per cent of its workforce after blowing $6 billion on bad bets in the natural gas market, the pressure is mounting for hedge funds to come under more regulation.

Enter John Plender from the Financial Times with his piece arguing that more regulation might be a case shooting the messenger.

The real problem, he says, is the systemic risk created by changes in banking where credit risk is put into financial instruments and taken off bank balance sheets. And when thhat happens, the lender is less concerned about loan quality.

All this in a climate of more enmeshed connections between banks and hedge funds with the FT reporting that Morgan Stanley is moving to increase its exposure to the booming hedge fund market by with the possible acquisition of FrontPoint Partners for about $300m.

The connections are opening the way for potential conflicts of interest.

The reality is that unregulated hedge funds are now among the biggest clients for big banks and that can turn the banks into "conflict-making machines", reports CFO.com."

The piece raises good questions about what the bankers are doing with private, non-public information of their other clients.

As the insider-trading lawsuit against Citigroup now shows, the banking structure is now so convoluted, that these conflicts are inevitable. The question is how to manage them. And it also means banks are going to come under more heat from regulators.

Of course, there is another systemic risk with hedge funds. It lies in the volatility of the market that has turned the funds into a trillion-plus industry. It's about the systems, not the traders. I explore that in a piece I have written here.