Yes it is, AIG used bogus warrant sales, it was not insurance, to pay off current loses, the spent all the rest!! LOL, But it was still crooked and should be regulated out of business just like hedges and credit default swaps all the DERIVATIVES BS.
Here we part company. The problem with many hedge funds is that they aren't hedged. Originally, hedge fund was applied to a long-short strategy; now it means just about any private investment vehicle which escapes regulation under the Investment Act because its members are accredited investors. Yes, I ran a small one, too, but it wasn't leveraged.
Derivatives, properly used, help limit risk.
The real problem is leverage and principal at risk. Like excessive credit (to which these are linked) too much brings down the house on players and non-players alike.
Regulation of large money pools is a tricky business. It is difficult to create regulations that are actually relevant, and it is difficult to administer them effectively. Perhaps some sort of overall leverage limits on large players might be in order, but then you run into problems of jurisdiction on international players.