No one would expect a top gourmet chef to share his recipes with his competitors. Yet many politicians and policymakers think that hedge funds should have to publicly disclose their proprietary investment strategies.

The President’s Working Group on Financial Markets recently examined the issue and found no need for additional regulation, arguing that existing market policies work well to protect investors from risk. But Connecticut Attorney General Richard Blumenthal wasn’t satisfied. Mr. Blumenthal announced that Connecticut may implement disclosure requirements of its own if the Feds won’t step in.

Mr. Blumenthal’s position reflects a widespread failure to appreciate that like top chefs, hedge fund managers rely on a certain degree of secrecy to perform at the highest level. Mandating greater transparency in the hedge fund industry would be like forcing Le Cirque to print nutrition facts on the menu: innovation and customer satisfaction would suffer.

Hedge funds are sophisticated investment vehicles open only to wealthy individuals and institutional investors, such as pension funds. These investors don’t know—and don’t care to know—the day-to-day details of fund management. Just as discerning diners know a good meal when they taste one, large investors measure funds by results. And the results, so far, have been good: The hedge-fund industry has doubled in size over the past several years and now holds about $1.7 trillion in assets.

Mutual funds and publicly traded corporations are required to disclose their investments and trading activities, and with good reason: transparency reduces corruption and allows the public to better evaluate market risks. But hedge funds are different. Unlike mutual funds and corporations, hedge funds gain their competitive edge through their proprietary strategies. If hedge funds couldn’t keep their trades under wraps, their competitors would quickly copy their tactics, reducing their effectiveness and diminishing their value to investors. Public disclosure would also reduce incentives to develop the financial innovations that result in more stable, efficient markets—a fact recently acknowledged by German Finance Minister Peer Steinbrück at the February G7 meeting, even as he called for an inquiry into transparency.

These risks might be justified if the lack of transparency in the hedge fund industry was seriously harming investors, but even the funds’ most strident critics would be hard pressed to make that case. Of course, mandatory disclosure would not significantly affect hedge funds with more mundane investment strategies. But perversely, forced transparency would undermine precisely the most talented managers—those who are already most successful at managing investment risk.

Moreover, the highly complex risks faced by hedge funds are constantly changing. This is why Federal Reserve Chairman Ben Bernanke rejected a May 2006 proposal to create a database of hedge fund investments. He noted that, for the database to be useful, regulators would have to gather and process massive amounts of data at least daily and somehow respond to high-risk situations without destabilizing markets—a highly unlikely scenario.

Mandating greater transparency in the hedge fund industry would be like forcing Le Cirque to print nutrition facts on the menu: innovation and customer satisfaction would suffer.

Just as chefs are constrained by restaurant inspections, critics’ reviews, and customer feedback, it is not as if hedge funds operate without any oversight at all. The law already limits the amount of hedge-fund risk that banks and other regulated institutions can take on. Additionally, according to a Hennessee Hedge Fund Manager Survey, 86 percent of hedge funds were registered with a regulatory body (such as the Securities and Exchange Commission) in 2006, and some 90 percent of hedge funds that registered pursuant to a now-defunct SEC regulation have chosen to remain registered voluntarily. Hedge funds are willing to register, which requires publicly disclosing basic information about the fund and its manager, because of the benefit disclosure may provide: credibility with investors. Hedge funds are subject to private oversight as well; Standard and Poor’s and Moody’s recently began rating aspects of hedge fund risk, making them the Michelin and Zagat’s of the hedge fund world.

Finally, just as a chef will usually disclose to an inquiring customer what particular blend of spices went into that famous risotto, hedge funds already provide significant amounts of information directly to investors, lenders, and other stakeholders who need it. Large pensions often demand, and receive, disclosures about funds’ risk management practices, which can benefit individual investors with less clout as disclosures breed improved practices. Just a few weeks ago the Fortress Investment Group became the first U.S. asset manager involved with hedge funds to go public—and raised $634 million as a result.

Hedge funds know that transparency can yield substantial benefits, and are willing to disclose information under the right conditions. But one-size-fits-all public disclosure requirements would crowd the market with confusing and redundant data, overwhelm regulators, and give investors a false sense of security. The federal government seems to understand that hedge funds, and those who invest in them, are in the best position to determine how transparent the funds should be. We can only hope that state officials like Mr. Blumenthal will eventually come to the same conclusion.

Houman B. Shadab is a Senior Research Fellow with the Regulatory Studies Program at the Mercatus Center at George Mason University and has worked as a securities and commercial litigation attorney in Los Angeles and New York City.

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