In an exclusive interview on cnbc.com, Treasury Secretary Henry Paulson said hedge funds have had a positive impact on capital markets but need to be more closely monitored in an effort to protect investors.
"This is something we are giving a lot of thought and attention to," Paulson told CNBC's Maria Bartiromo. "There have been major changes in the capital markets over the past five to ten years, including big increases in private pools of capital."
Paulson said they are examining hedge funds in three areas, including: investor protection; systemic risk, or ensuring that there is enough liquidity in the system; and transparency between the hedge funds and those lending them money.
The Securities and Exchange Commission adopted a rule in 2004 ordering most hedge fund advisers to register with the investor protection agency. But a federal court threw out the rule in June.
Since the SEC's registration rule was struck down, the agency has been developing scaled-back rule proposals, including one to raise the minimum net worth an investor must possess to be allowed to invest in hedge funds. That proposal is expected to come before the SEC for a vote next week.
The average annualized performance of hedge funds 14.03%, according to the HFRI Fund Weighted Composite Index. The typical hedge fund charges investors a 2% management fee, along with a 20% share of profits.