The Case for Mutual Funds vs. Hedge Funds

As more details of the Bernie Madoff investment scandal unfold, plenty of investors feel panicked. After all, if the fat cats were robbed by hedge funds, how can the average investor protect a small account from fraud?

The safest approach is to tuck cash into banks and Treasury bills, but there is another option: mutual funds.

The funds have come through the downturn with their reputation for transparency intact. While Congress is planning investigations of brokers and hedge funds, there are few calls to reform mutual funds. At a time when Lehman Brothers and Bear Stearns have collapsed, major fund companies -- such as Vanguard and T. Rowe Price (TROW Quote) -- remain on sound footing.

To be sure, most funds have suffered sizable losses during the past year. But patient shareholders are likely to recover as the economy revives. That is very different from the thousands of Madoff investors who have lost everything. ...