From: Albert Sanders
I have invested in hedge funds since 1994. I would like to suggest more specific rules in making disclosures to reduce fraud. One thought is that the amount of money borrowed (the percent of leverage) should be disclosed. Some advisors take enormous risks that should be pointed out at least quarterly. This should include all "down-side" risk. What could be lost if an investment works out in the worst possible way ("worst-case"). This would apply not only to leveraging but to short selling and any other dangerous practices.
Nomenclature should be standardized. For example, "merger arbitrage" is not arbitrage at all. It is speculating that a merger will take place--quite different from assumed risk-free arbitrage. Same with certain convertible bond "arbitrage" which may really be speculating that certain things will "regress to the mean". Sometimes they do the opposite.
Advisors often say, rather casually, that all their personal investable funds are invested alongside the outside investors. They should be required, at least quarterly, to show the actual numbers: how much do they invest and how much is in the same investment they are proposing for the investor?
I think maybe having to report the actual risk, in percent as well as dollars, of each investment, is perhaps the most important.