Hedge funds can make money even when markets fall

Chief executive Samuel Israel and the fund's head of finance Daniel Marino admitted to defrauding investors by misrepresenting the value of the fund.

They admitted reporting false rates of return on the fund as well as creating a phoney accounting firm as a cover.

Bayou is the latest in a growing number of frauds involving hedge funds.

These funds are largely unregulated and traditionally serve institutions and wealthy investors.

In the last five years, US regulators have unearthed 51 cases involving hedge fund advisers who have defrauded investors to the tune of $1bn (�830m).

Guilty pleas

Samuel Israel, who founded Bayou in 1996, told the federal court that he knowingly sent false quarterly and annual statements and bogus newsletters to investors.

"My purpose was to induce these people to invest in Bayou or keep their investments in Bayou," Mr Israel said.

He plead guilty to one count of conspiracy, one count of investment adviser frauds and one count of mail fraud.

If convicted he could face up to 30 years in jail.

Mr Marino pleaded guilty to four counts of fraud including investment advisor fraud, mail fraud and wire fraud.