The typical U.S. hedge fund will require that an investor is “accredited” under U.S. Securities and Exchange Commission guidelines. An individual investor is accredited if he or she has a net worth (including one’s home and furnishings) in excess of $1,000,000 or has had an individual income of more than $200,000 for the past two years or joint income with one’s spouse in excess of $300,000 in each of these years and has a reasonable expectation to reach the same income level in the current year.
Those hedge funds whose investment decisions are directed by a Registered Investment Advisor also may require that an individual investor be an “eligible client.” An eligible client has at least $750,000 under management with the investment advisor or net worth in excess of $1,500,000.
The eligibility standards will vary for different types of investors (trusts, corporations, IRAs, etc.). If you would like more information on investor suitability, please contact us.
Any statistic, such as the Van Ratio (also called the Risk of LossTM) is based on the historical behavior of whatever is being measured – in this case, hedge funds. It measures the Risk of Loss in that past period. If the world didn’t change in any way, and the fund’s behavior didn’t, and Risk of Loss was a perfect measure, then Risk of Loss (or any other statistic being used) might well provide us a solid guideline for the future. Unfortunately, things don’t work that way. No statistic is perfect, and, in addition, both the world and fund behavior do change. Accordingly, investors should exhibit caution in using statistics as guidelines to investment decisions. Statistics do not and cannot predict events in the future with any certainty. Investors should make their decisions based on a variety of factors in addition to looking at statistics and past results as possible guidelines.
Hedge funds have inherent in them an element of risk that is not present to the same degree in many other investments, such as mutual funds. That risk is the future use of bad judgment by the fund manager in such areas as portfolio concentration, leverage and/or liquidity. Further, that particular risk is not measurable, as, by definition, it relates to the future. For example, many hedge funds use large amounts of leverage and the risk control of the fund’s leverage is often totally dependent, from moment to moment, on the judgment of its manager. While the history of hedge funds overall has been good in this regard, there have been occasional hedge fund failures.
Accordingly, a single hedge fund, or a number of hedge funds, that might exhibit low Risk of Loss characteristics for the past, could become much more risky very quickly if the hedge fund managers in question did not control risk as well as they had in the historical periods measured.
Neither statistics nor past results are necessarily indicative of future performance.