The typical large hedge fund would be insolvent if they lost 28%. That's the risk of levering up 2.5 times.
This article describes data recently collected from large (over $500M in net assets) hedge funds by the SEC. In aggregate the funds have $1.47 Trillion in net assets and $1.06T in debt, which leaves $0.41 Trillion of equity. Of course hedge funds are looking at the other side, which is if they achieve 10% growth of net asset the return on equity would be 36%.
Investors in hedge funds are usually very sophisticated, professional money managers, such as pension fund managers. Why would they pay a hedge fund 20% of gains to take on leverage and the inherent risks with their equity. Do they believe that hedge fund managers have an edge so that gains are more assured? Is this their way to buy in to high frequency trading, market manipulation, and insider trading?