Hedge funds vs. mutual funds

A lot of rich people who invested in the Bayou Group's hedge funds in the past two years are probably wishing they had put their money in mutual funds instead.

Hedge funds consist of large pools of money that use a variety of investment methods -- ranging from simple strategies such as buying securities or engaging in futures trading, to more complex transactions such as placing simultaneous trades on a similar set of investments to exploit the spread in values or returns. As a rule, hedge funds make some very risky bets, but some have posted really stellar returns for their mostly rich investors.

And some have lost, big time. Investors in Bayou Group found this out when disbursement checks started to bounce this month. Connecticut investigators are now trying to figure out what happened, and if Bayou executives broke any laws. It could be tough for the investors to get back the money that's owed them, as well as bring people to trial, owing to the relative lack of regulations governing hedge funds.

Certain mutual funds also have high-risk strategies, but there is a far greater degree of transparency in their operations, owing to an established set of federal and state governing the funds and fund companies, as well as industry regulations.