NEW YORK (Reuters) - Light regulation of hedge funds has worked well so far and seems appropriate given the benefits they provide to the financial system, Federal Reserve Chairman Ben Bernanke said Wednesday.

Speaking at New York University Law School, Bernanke said it might be possible to apply more sophisticated risk-management techniques but stressed that the purpose of the big funds is to take risks.

"Market discipline does not prevent hedge funds from taking risks, suffering losses, or even failing — nor should it," the central bank chief said. "If hedge funds did not take risks, their social benefits — the provision of market liquidity, improved risk-sharing, and support for financial and economic innovation, among others — would largely disappear."

Hedge funds are investment pools that are aimed primarily at wealthy investors and institutions. Bernanke said the regulatory oversight that was applied to them was "relatively light" and acknowledged that their growing market share has raised concerns about possible systemic risk.

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"The failure of a highly leveraged fund holding large, concentrated positions could involve the forced liquidation of those positions, possibly at fire-sale prices, thereby imposing heavy losses on counterparties," Bernanke said.

"In the worst scenarios, these counterparty losses could lead to further defaults or threaten systemically important institutions," he added.

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