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21 Nw. J. Int'l L. & Bus. 703 (2000-2001)
Hedge Funds, Hot Markets and the High Net Worth Investor: A Case for Greater Protection

handle is hein.journals/nwjilb21 and id is 711 raw text is: Hedge Funds, Hot Markets and the High Net Worth Investor: A Case for Greater Protection? By Helen Parry I. INTRODUCTION: HEDGE FUNDS AND HIGH NET WORTH INDIVIDUALS Hedge funds, so often booed and hissed by politicians and regulators, are now strutting their stuff in the limelight to the acclaim ofpension funds, unit trusts and private investors. A. Hedge Funds Are Back Jaded and shocked investors, reeling from the devastating effects of the dot.corn crash, are turning to hedge funds and other forms of alternative in- vestment in the hope of beating current downward trends in equity markets. The proud boast of hedge fund managers that they can produce absolute re- turns even when such market conditions prevail is inevitably alluring, and there is ample evidence that the hedge fund market is red hot.2 Of par- ticular interest are classic hedge fund strategies, in the tradition of the father of modem hedge fund investing, Alfred Winslow Jones. These strategies are based on the principle of taking long positions in undervalued stocks and short positions in overvalued stocks with a modest element of lever- age.3 Highly-leveraged hedge funds, in the style of Long Term Capital 1 Sprucing Up Their Appearance, MONEY OBsERVER, Sept. 19, 2000. 2 Robert Clow, UBSAttacks Hedge Market, FINANCIAL TIMES, March 8,2001. 3 Imagine for instance that Jones had $10,000 to invest. He would borrow 50% of this figure, then buy perhaps $10,000 of stocks and sell short $5,000. Capital had to be put up to enable the short sales to take place, or to be held in reserve for topping up margin calls if they didn't perform as expected. So while the total involvement in the market represented $15,000 (150% of his capital) his net exposure as a percentage of his capital was potentially

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