The apparent collapse of a $400m US hedge fund group in a bizarre series of events under investigation by state and federal regulators has left investors nervous and resulted in calls for more regulation of the $1,000bn industry.

The Bayou group, run by Samuel Israel, told investors it planned to close and would return their money by mid-August, but it failed to give back any money. The Federal Bureau of Investigation, the Securities and Exchange Commission and the Connecticut attorney-general are investigating for fraud.