Investors are pouring billions of dollars into these unregulated investments, shooting for high returns. Here's what to watch out for

WITH STOCKS SPUTTERING AGAIN, investors of all stripes are flocking to a familiar fad: hedge funds, which are supposed to deliver decent gains even in bad markets. Yet the "gold-rush mentality," warns William Donaldson, chairman of the Securities and Exchange Commission (SEC), not only threatens our retirement savings but also could one day destabilize the world's money system.

Yes, hedge funds are back--and bigger than ever. You may recall George Soros' minting a $1 billion profit in one month on a bet against the British pound in 1992 and later spurring the ire of small nations, which feared his currency plays...