Mutual funds and hedge funds are popular forms of investment in the United States and throughout the world. Mutual funds are regulated by securities' regulators in the United States. Hedge funds, however, are not regulated because of their operational flexibility in investment. U.S. regulators are concerned that if they regulate hedge funds, hedge funds will, along with their economic benefits, emigrate to offshore havens. However, if we consider the importance of the American financial markets in the world, this idea can be dismissed. Due to globalization in the capital markets, small events in the United States can have large effects in the world market. In addition, the bankruptcy of hedge funds can have severe consequences. This thesis will explain the hedge funds industry, explore the definition of hedge funds, their structure, their investors, and their effects on the financial market. It will also evaluate the difference in securities regulation between mutual funds and hedge funds. In particular, it will fully discuss some problems in the LTCM episode and other hedge fund debacles. In addition, it will explain the activities of the financial community. In conclusion, it will present my suggestions for regulation.