A closed loop is a circulation system in which water is drawn out of the tank and pumped back to the main tank using closed piping that is open only on the intake (in the main display tank) and output (also in the main display tank.) In other words, it bypasses any sump.
As for the benefit of a closed loop over powerheads here are my thoughts:
1. Cost- to get the same flow, you would need many powerheads. One main pump and some PVC is less expensive in the long run.
2. Maintenance- Maintaining 5+ powerheads is a pain. You should clean each one regularly and that requires removing each one. Maintaining the pump can be done without getting my hands wet.
3. Aesthetics- Powerheads look nasty! The only thing you see in my tank is one intake line (which will soon be hidden by rock) and two sea swirl nozzles.
4. Heat- Powerheads add substantial heat to the water. Using an external pump means that only the impellor is in contact with the water. It is a much cooler solution than powerheads
5. Closed loops are cool! I like to show it off to visiting reefers.
Also, a closed loop provides much more flow than a sump return pump since in a closed loop the pump does not have to overcome gravity.
Here are some great threads on the subject:
http://reefs.org/phpBB2/viewtopic.php?t=22240
http://reefs.org/phpBB2/viewtopic.php?t=8903
http://reefs.org/phpBB2/viewtopic.php?t=6408
Here is a diagram and some photos of how I set my closed loop up:
Diagram:
Left hand side which shows intake tube going up and over rear wall of tank and also shows the left hand sea swirl
Photo of the intake tube under water:
Photo of return pump under the stand:
Hope this helps.
Ernie