January 26, 2007
Every hedge fund should publish on the first page of the prospectus the maximum investment leverage they will use in the fund.
It needs to be expressed as a percentage, for example, 100%, 200% or even 500% or greater if that is the maximum leverage the fund wishes to use. Call it truth-in-labeling.
Every investor needs to know this to determine the risk.
Long Term Capital and Amaranth are perfect examples of extremely high leveraged hedge funds. There is nothing wrong with high leverage, but you can be sure 95% of the investors in these two now defunct funds did not realize the extreme leverage and therefore could not understand the risk factors associated with their investment.
Any hedge fund with leverage of 150%, for example, or less should be available to investors using current accredited investor standards. If the leverage is 150% or higher, the new proposed standards should be used.