[exelius]

Many "professional investor" level assets would be rightfully considered scams if sold to a less-knowledgeable investor: often times, individual positions within a fund are leveraged dozens of times to where a small move in the underlying asset can wipe out large portions of the capital in a fund.

If you used dozens of stocks as collateral to finance the borrowing of money to purchase other assets, which you then use as collateral to buy more assets, it would be considered a scam -- but not in a hedge fund. This can lead to large swings in volatility and hedge funds should only be used as part of a portfolio investment strategy -- a professional investor will use them to cancel out risk in other areas of their portfolio.

The risk is that a non-professional investor uses these instruments as primary investment vehicles without understanding their purpose. Because many hedge funds do operate very similar to the ways that illegal stock scams run: the difference is that the investors know exactly how and why these funds can implode and are willing to take that risk.

EDIT: That said, the specific qualifications for a "professional investor" definitely need some work.