Forbes raises a question about whether The Goldman Sachs Group (NYSE: GS)'s $9 billion hedge fund, Global Alpha, will fail. I don't know, but rumors to that effect raise serious questions about whether the banks will be able to clean up the messes they make in pursuit of those eight figure bonuses. That's because Global Alpha is a symptom of a bigger problem -- the Black Box Market.

I pointed out that Global Alpha was having problems a few months ago in this post. So it doesn't surprise me to read that it's down 16% for the year. Global Alpha lets computers make decisions. Its investors just have to trust that those computers always make money no matter what happens. Unfortunately, the 1998 collapse of Long Term Capital Management demonstrates that smart computer programs can fail at the point of maximum peril.

And this brings us to the Black Box Market. As this morning's announcement by BNP Paribas that three of its subprime hedge funds will not redeem investors' money suggests, the global capital markets are at risk because of their opacity. Specifically, The Black Box Market entails four mysteries:

Carnegie Mellon University Professor Allan Meltzer has an interesting editorial in this weekend's Wall Street Journal (subscription required). As Congress considers ramping up hedge fund regulation, Meltzer isn't buying it: "... whatever the perceived problem, more regulation is not the answer. It is far better to change some incentives for excessive risk-taking. The old saying is true: Capitalism without failure is like religion without sin. The answer to excessive risk-taking is 'let 'em fail.'"

He makes a compelling case against bailouts of collapsing hedge funds, arguing that these can serve to increase excessive risk-taking.

The recent explosive growth in hedge funds and private equity will lead to some inevitable blow-ups in the years to come, probably starting soon. Just recently, a pair of Bear Stearns (NYSE: BSC) funds collapsed. As the panic sets in, investors and regulators would do well to keep a copy of Meltzer's column close by. Only through painful failure will investors learn the pitfalls of excessive risk.

See also:
Jon Ogg: Bear Stearns' subprime fund implosion -- media hype, or serious meat?
Kevin Kelly: Less talking, more hedging please
Tom Taulli: No June gloom for hedge funds
Zac Bissonnette: Is Bear Stearns in play?