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 hedge fund, run by Samuel Israel, told investors it would close and return their money in August, but 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.