Ms Myron, I felt compelled to comment on your recent RG article with the above title.

Upon reading, it is clear that your article has nothing to do with credit default swaps whatsoever. It would appear that you have picked up on a particular type of security (which was also mentioned by Secretary Paulson) and tried to weigh on the current global financial situation for the benefit of your readers.

While I applaud your intention, the example you gave was of an insurance company that miscalculated the probability (and magnitude) of losses on policies issued and nothing at all about debt markets, how they work and what role CDSs play.

It is misinformation of the type that is in your article that keeps the public at large in the dark. What is more worrying is that if financial professionals don't understand the issues, the prospects of recovery and reform are grim indeed.

FYI I include the following description of a CDS from an online investment dictionary (no need for 150 pages).

Scott Wade, United Kingdom.

Credit defaults swaps for dummies generated this Letter to the Editor - which has been printed verbatim.

After receiving this wake-up note, my first impulse was to make excuses, which I will do anyway, but my second thought was that I was delighted to know that these attempts at investment clarity are read so far away. Perhaps the reason, it was read was the attention-catching title, folks, which I will have you know that I did not generate, this was an editorial decision. However, in all fairness, here is my excuse - what the reader did not know was that this was the second in a series of the new coming-to-light risks that investors must be aware of given the problems in this current market volatility. In addition, that there was an explanation of how credit default swaps work the prior week.

It is a wake-up call for me, however, to be sure to provide completely accurate information as well as referring to prior articles.

Besides the use of credit default swaps, there are a significant number of other risks that may be attached to your investments, whether a mutual fund, a managed portfolio, a hedge fund and so on. Over the next several months, we will explore the issues, both positive and negative of the following list.

• Leverage

• Liquidity

• Transparency

• Counterparty relationships

• Balance sheet strength of manager/fund company/investment issuer company

• Style drift / asset allocation adherence

• Probability of success - historical patterns

• Fees and documentation

It is not just risk issues on the investment management side, but there have been unnoticed exposures to custodians of securities who have ended up in bankruptcy, and the client assets held in custody are in limbo until the processes are sorted out.

• Custodial relationships

• Nominee name

• Qualified Intermediary issues

• Cash Sweep funds

• Margin accounts

• Street name lending

• Company balance sheet strength again, this will be a recurring theme

• Internal controls

Leverage strategies in investment management are used to enhance returns. Almost all hedge funds employ some leverage; it may start with a two-to-one strategy, all the way up to 20 or 30-to-one.

Wickipedia states that investing in certain types of hedge fund can be (but is not necessarily) a riskier proposition than investing in a regulated fund, despite a "hedge" being a means of reducing the risk of a bet or investment. Leverage is one of the primary reasons for the increased risk in hedge funds as an industry, though by no means all hedge funds have all of these characteristics, and some have none.

In addition to money invested into the fund by investors, a hedge fund will typically borrow money, with certain funds borrowing sums many times greater than the initial investment. If a hedge fund has borrowed $9 for every $1 received from investors, a loss of only 10 percent of the value of the investments of the hedge fund will wipe out 100 percent of the value of the investor's stake in the fund, once the creditors have called in their loans.

If your fund is levered six times and is down 10 percent, the compound effect is 60 percent negative return.

In September 1998, shortly before its collapse, Long Term Capital Management had $125 billion of assets on a base of $4 billion of investors' money, a leverage of over 30 times. It also had off-balance sheet positions with a notional value of approximately $1 trillion.

No wonder that at that time, all of the major investment institutions (and Warren Buffet) were called on to bail out this firm.

That was then. In one documented case (and there are more) earlier in this year, the fund was levered more than 30 times.

The managers could not meet its margin calls by its creditors, nor obtain any additional credit. The market extracted its toll and the fund went out of business.

Why is the market still so volatile? According to Frank Holmes, CEO, US Global Investors|September 10, 2008: "Leveraged hedge funds are selling billions of dollars worth of commodities investments to meet their redemption demands, and this is another severe short-term factor driving down prices. Thus, we are caught up in this powerful force that some have described as a 'mechanical sell-off' by hedge funds and banks that need liquidity."

What to think about when reviewing your investments? On this particular issue, the first question is, do you have hedge funds or fund of hedge fund exposures? If the answer is yes, pull out the prospectus for those holdings and dig through the index to find the disclosure on leverage.

If you cannot locate your original information or find that discussion listed, then consider having a meeting with your financial representative to review your investments for overall risk.

Readily available disclosures. Because these relatively unknown strategies (to the layman) have been discussed so widely by the press and the media, many portfolio and fund managers now routinely state their risk exposure (or hopefully lack of) in investor letters and market alerts. If you are receiving these, it will go a long way to make you feel more comfortable with the investment assets you own.

Wake Up Call for Financial Literacy. In a positive way, we have all been forced into rapid rather complex lessons on how securities can be impacted by various kinds of market forces. In a less positive way, it is truly a wake-up call to anyone who owns investments to ask more questions, and understand the 'real' risk that you have accepted.

Martha Harris Myron CPA -NH1929, CFP® -67184 (US licenses) TEP - Society of Trust and Estate Practitioners. She is a Senior Wealth Manager at Argus Financial Ltd., specialising in comprehensive financial solutions and investment advisory services for individual private clients and their families, business owners, endowments and trusts. Direct line: 294-5709 Confidential email can be directed to mmyron@argusfinancial.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.