Hedge Funds are loosely regulated investment pools that can "go anywhere" and "try anything".  The record shows that there have been a number of high profile "blow-ups" in this area

• "Amaranth Halts Withdrawals" and "Losses could be as much as 70%" - Wall St. Journal, 10/1/06
• "Up in Summer, Brian Hunter Lost $5Billion in a Week" - WSJ, 9/19/06
• "Hedge Funds Miss Their Target" - WSJ, 9/13/06
• "At Goldman, Elite Hedge Fund Stumbles" - WSJ, 9/13/06

Secondly, Hedge Funds returns have not outperformed equity markets in the way legend would have it.  The Wall St. Journal (9/20/06) quotes a study by Yale Professor Roger Ibbotson of Ibbotson & Associates:  

• "Hedge funds appear to have clocked an eye-popping 16.5% a year between 1994 and 2006, easily outpacing the 11.6% average of the S&P 500 
• "However, this 16.5% average is missleading..." because of (a) "backfill bias" when "only funds with stellar records typically report prior performance"; and (b) "...when poorly performing hedge funds go out of business, their dismal results are often ignored" 
• When the study adjusted for these types of errors "Ibbotson calculated that the funds returned just 9% a year, less than the S&P 500's 11.6%"