Hedge funds are private partnerships for the wealthy, and until the late 1980s they were a kind of financial cottage industry, consisting of a handful of small funds, run by prominent investors like George Soros and, in earlier years, Warren Buffett. Because they cater to the wealthy, which in the eyes of the law are believed to be able to look out for themselves, they have generally escaped regulation. However, the collapse of Long Term Capital Management in 1998, a vastly overleveraged fund which nearly brought down the entire financial system, proved that hedge funds can be dangerous.

The Obama administration recognizes the need for stepped-up oversight of hedge funds—in theory. Treasury Secretary Timothy Geithner talks a good game, telling the House Financial Services Committee that hedgies must be subject to a “higher set of standards.” But when President Obama’s long-awaited financial-regulation plan was released in June, it merely required most hedge funds to register as investment advisers and to file periodic financial statements.

The problem is that most large hedge funds already register as investment advisers. It’s such a toothless requirement that it was endorsed by the hedge fund trade association. Filing financial statements is aimed at enabling regulators to determine if they pose a systemic risk. But hedge funds move money around so quickly that a single snapshot of their financial picture is utterly useless.

The administration has also included hedge funds in its “polluter pays” model, which requires all financial institutions with more than $10 billion in assets to have to bail out the failure of one of their number. That’s a step in the right direction. But it makes even more sense for financial regulators to keep close watch over hedge funds, regardless of size, before trouble develops.

Hedge funds need a tough overseer, at least as much—if not more so—than the major banks. The banks have rudimentary protections against excess, such as the theoretical oversight of boards of directors and shareholders, since most big ones are public companies. Hedge funds are totally opaque, with no obligation other than to their own investors, who often have no idea what they’re doing. The SEC is just too feeble, and too overburdened, to take on the task of supervising a $2.5 trillion (or whatever it is) asset class. A new regulatory apparatus is sorely needed.

Secrecy plus power is a dangerous combination, and a single person or small group of people controlling billions of dollars in net assets—with access to billions more in borrowed money—is just too dangerous to be tolerated. By all means, toss in jail the really one bad ones, the insider traders and their ilk. Throw away the key, for all I care. But it’s the “good guys” that have me worried.