The following is a summary of the Hedge Fund FSP Risk Disclosures as indicated in Board Notice 571 of 2008. The risks detailed below outline some of the risks associated with investing in Hedge Funds and are by no means exhaustive. With legislation regarding the regulation of Hedge Funds under CISCA pending, it is imperative to note that Hedge Funds are currently not regulated.
Hedge Fund strategies may include leverage, short-selling and short-term opportunistic investments which give rise to strategies that may be inherently risky. In addition, portfolios often include unlisted, low grade, foreign and other exotic instruments that may be difficult to understand (increasing the potential for incorrect valuations, potential defaults and currency risk).
Managers are allowed to use leverage to amplify investment decisions, this however means that volatility of the portfolio may be a multiple of the underlying investment instruments.
Short selling is also allowed, effectively allowing the fund to borrow securities in order to sell them short. Where the price of the short instrument moves unfavourably, the manager may be forced to buy back the securities at a loss.
Investor liquidity may not be guaranteed as investments may not be readily liquidated due to the nature of the strategy. Another factor affecting investors is the possibility of changes in regulation or prime broker or custodian (third party) default. Investors should be aware that past performance is not a reliable indicator of future performance.
Fees associated with Hedge Funds may be relatively higher than other investment products and are often performance based. In addition, the transaction costs of the fund may be greater due to potential aggressive trading etc.
It may be the case that reporting and dealing with the manager is infrequent or limited to monthly or quarterly updates. Entry and exist into and from the fund may also be seldom.