As markets continue along the road to recovery, many hedge fund investors have been encouraged by positive returns this year. The way in which our industry has been able to navigate some difficult financial waters over the past two years gives us reason to be optimistic about the future.

Yet, we cannot lose sight of the fact that large numbers of people across the country are still hurting. The financial crisis sparked a massive loss of jobs and homes, and many Americans still do not understand what caused those losses. Hedge funds are not to blame, but they have been unfairly lumped in with the rest of “Wall Street” all the same. What is commonly overlooked, however, is that hedge funds have a direct, positive impact on the citizens of “Main Street” every day.

Pitting “Wall Street” against “Main Street” is counterproductive and, as our members know, a false representation of how these two groups depend on one another. The best example of this dependence is the growing relationship between hedge funds and public pension funds, which are responsible for the retirement hopes of millions of “Main Street” Americans.

CalPERS, the largest public pension fund in the U.S., maintains a $5.7 billion hedge fund portfolio (Pensions & Investments), inextricably linking the performance of those so-called “Wall Street” hedge funds to the retirement benefits of more than 1.6 million California public retirees, employees and their families – all living on “Main Street.”

Many pension funds have recently committed to increasing their allocations to hedge funds, including the $11.8 billion Indiana Public Employees’ Retirement Fund, which currently allocates 6.6% and has a target of 10%; and, the $60 billion Ohio State Teachers Retirement System, which announced it will increase its opportunistic/diversified investments (including hedge funds) to a maximum 5% by 2012 (Infovest21).

This trend of increasing allocations demonstrates that the administrators of these public pension funds have been pleased with our industry’s ability to deliver good performance on their investments. They have good reason to be pleased. In 2008, the average hedge fund lost 19% (Credit Suisse Index Co.), while the DJIA was down 33% for the year. In 2009, the average hedge fund was up 19% (Credit Suisse Index Co.) matching the 19% gain for the DJIA.

Performance attracts attention: a 2009 analysis of the industry estimated that 72% of hedge fund assets come from institutional investors like pension funds and university endowments (Preqin). The statistics are clear: the professionals entrusted with securing the financial futures of millions of hardworking Americans are investing with hedge funds. This flow of money from institutional investors also serves to intertwine further the interests of teachers, firefighters, service workers, state employees, aspiring college students, professors and many others who reside on “Main Street” with those of hedge fund managers.

Despite the growing alignment of interest between hedge funds and millions of Americans, some regulatory proposals in Washington have taken a rather narrow, punitive approach to our industry. The most glaring example of this is a proposed “transaction tax” on securities, futures and derivatives trades. This tax is aimed at “Wall Street” profits, but in our industry those profits are shared by “Main Street.”

A transaction tax would have to be accounted for in the value of each security, futures and/or swap contract, which would have the effect of lowering the prices on these instruments. Pension funds, endowments and personal retirement accounts may believe they are exempt from this “hidden tax,” but a pension fund with assets in a market will lose significant investment value without ever executing another transaction.

Perhaps more troubling is the effect this proposal would have on the ability of American businesses to expand and create jobs. A transaction tax would make it more difficult for businesses to raise sufficient capital to support job growth.

Intended as a populist response to American anger over the financial crisis, this “solution” could end up doing more harm than good. Throughout the financial regulation reform debate I have advocated for smart reforms. Reform is intended to correct mistakes, close gaps and protect the public. Reform should not be confused with retribution.

MFA has worked hard over the years to educate policy makers on this tax issue and many others that are central to our industry. We must begin to expand that educational effort to the general public, especially those paying into pension plans, and help them understand how our industry is connected – in many positive, productive ways – to their daily lives and hopes for retirement.

Our ability to reach out to a more general audience and to continue educating policy makers rests, ultimately, on the quality of our arguments as supported by good data. That is why MFA has announced it will begin securely collecting and aggregating data from hedge funds, funds of funds and managed futures funds, which will allow us to better understand and represent our industry. This data will give us a more definitive and timely picture of how institutional investors are allocating to our industry. And that information will be incredibly important as we continue to make a case for hedge funds’ contributions to the public interest.

There is still much work to be done on the regulatory, legislative and public education fronts, but I believe MFA and its members are uniquely positioned to meet these challenges. And to take full advantage of that positioning, we must continue to make it clear that we are not working against those who have been hurt by the financial crisis, we are working for them – we are all interconnected and living on the same street.