Five years later, the most ironic part of Bernard Madoff’s legacy is clear: after his Ponzi scheme made hedge funds seem scary, especially to individual investors, the industry got busy making them seem safe enough for everybody.

So-called liquid alternative funds have become the hottest thing in the mutual-fund business. These portfolios-essentially hedge funds with a longer, trendier name-employ such strategies as betting on mergers, wagering that stocks will go down as well as up, and using derivatives like futures and options. Their assets are up 33% this year to more than $244 billion, with nearly $53 billion flowing in through Sept. 30, according to Strategic Insight, a fund-industry research firm.