I think if anything they're a force for good on the rest of the market - someone needs to be there to buy assets that are both illiquid and risky, and both broker-dealers and (more recently) pension funds have been gradually regulated out of being that buyer.
In any case, I agree that hedge funds are more of a compensation scheme. My opinion of them is relatively low, but that's from the point of that investing in them is a bad idea. I don't think on net they have any bad effects on the rest of the market.