Hedge fund manager Michael Regan has pleaded guilty to running a Ponzi scheme. Manager of the Massachusetts-based River Stream Fund, he admitted to defrauding around 70 investors. The fund held just shy of $20 million in assets ... despite the relatively meager $101,600 sitting in its accounts. The fund purported to return 20 percent a year since 2001, paying out $9 million in "profits" and returned capital.

Wednesday, Bernard Madoff requested leniency through his attorney Ira Sorkin, who suggested a sentence of 12 years would be a sufficient penalty for his client's crime of stealing billions of dollars in one of the greatest frauds in history.

Sentencing by U.S. District Judge Denny Chin is set for Monday June 29, and the eyes of the world will be upon him. So will the eyes of the yet-to-be discovered fraudsters everywhere.

My thoughts on the subject are relatively simple and have little to do with revenge or payback. In cases like this I often remember a very old quote from another time and place.

The New York Times reports that a $2 billion hedge fund, Sailfish Capital Partners, has closed up shop -- flipped over by a lousy January. Granted, it was a tough month -- the average stock-picking hedge fund sank 4.1% in January. The S&P 500 was down 6% so that does not seem as bad -- but it was the hedge fund industry's worst performance since November 2000.

Hedge funds are big business. Since 2000, the number of funds has more than doubled, to 10,000 and they manage $1.9 trillion in assets. I guess that lousy performance explains why hedge funds have not been much help when it comes to recapitalizing U.S. banks. But I am a bit surprised at their lousy January performance. My newsletter was up 28% last year -- beating the S&P 500's 3.5% -- and up 2% in January thanks to one stock pick that rose 8% during the month.

Maybe I was just lucky but hedge fund managers are supposed to be masters of the universe and they certainly get paid enormous amounts of money -- 2% of assets under management plus at least 20% of the profits they generate above a minimum benchmark. And if hedge funds keep losing money, it's not clear how much longer it will be before some of the owners of that $1.9 trillion in assets start to withdraw their funds.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Forbes raises a question about whether The Goldman Sachs Group (NYSE: GS)'s $9 billion hedge fund, Global Alpha, will fail. I don't know, but rumors to that effect raise serious questions about whether the banks will be able to clean up the messes they make in pursuit of those eight figure bonuses. That's because Global Alpha is a symptom of a bigger problem -- the Black Box Market.

I pointed out that Global Alpha was having problems a few months ago in this post. So it doesn't surprise me to read that it's down 16% for the year. Global Alpha lets computers make decisions. Its investors just have to trust that those computers always make money no matter what happens. Unfortunately, the 1998 collapse of Long Term Capital Management demonstrates that smart computer programs can fail at the point of maximum peril.

And this brings us to the Black Box Market. As this morning's announcement by BNP Paribas that three of its subprime hedge funds will not redeem investors' money suggests, the global capital markets are at risk because of their opacity. Specifically, The Black Box Market entails four mysteries:

The Boston Globe reports on how Sowood Capital, a $3 billion hedge fund founded by a former manager of Harvard's endowment, collapsed this week -- costing Harvard $350 million.

Sowood, which has lost $1.6 billion dollars over the last several weeks, borrowed lots of money to bet on what it believed were low risk investments and backed them up with a hedging strategy intended to act as insurance in case anything went wrong. But markets reacted much differently than Sowood expected, driving down the price of its securities and rendering its hedges ineffective.

When Sowood went to sell its assets, it found no buyers. So it arranged for a Chicago-based hedge fund, Citadel Investments, to bail it out -- selling its securities at a deep discount. According to its founder Jeff Larson, Sowood did this "in order to avoid what we believed was the very real possibility of counterparties -- [e.g., lenders] -- seizing our collateral and liquidating or auctioning our positions. In such an uncontrolled process, we believe there was a high likelihood that little to no net asset value would remain for our investors."