With account minimums of as little as $25,000 and their availability now even through stodgy banks, hedge funds and hedge funds-of-funds are increasingly finding their way into ordinary investors' portfolios, MarketWatch reports.

And this has a number of financial advisers worried.

Although hedge funds are now required to register with the Securities and Exchange Commission, that measure only provides a thin layer of transparency and is really designed more to prevent the collapse of a fund, like Bayou Management, than down-in-the-trenches, everyday policing of hedge funds.

Other downsides to hedge funds, besides occasional fraud, are decreasing performance, rising fees and far higher risks than in mutual funds.

"I think hedge fund investing and certainly leveraged investing and speculating in various derivative forms are hugely risky propositions," said SEC Chairman Christopher Cox.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.