Hedge Funds, including funds of funds (collectively, “Hedge Funds”), are unregistered private investment partnerships, funds or pools that may invest and trade in many different market strategies, and instruments (including securities, non-securities and derivatives) and that employ different investment, hedging, leverage and arbitrage methodologies. Hedge Funds are not subject to the same regulatory requirements as mutual funds, including mutual fund requirements to provide certain periodic and standardized pricing and valuation information to investors. There are substantial risks in investing in Hedge Funds. Persons interested in investing in Hedge Funds should carefully note the following:
- Hedge Funds represent speculative investments and involve a high degree of risk. An investor could lose all or a substantial portion of his/her investment. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment in a Hedge Fund.
- A Hedge Fund may employ a distinctive strategy which may not have a readily ascertainable comparative benchmark or index.
- Hedge Fund documents are not reviewed or approved by federal or state regulators.
- An investment in a Hedge Funds should be discretionary capital set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for all investors. Only Qualified Eligible Investors may invest in Hedge Funds. Moreover, each Hedge Fund has specific requirements for an investor to be eligible to invest in that Hedge Fund which are contained in Hedge Fund’s offering documents.
- Hedge Funds may be leveraged (including highly leveraged) and a Hedge Fund performance may be volatile.
- Hedge Funds may use benchmarks or targets for measurement purposes. There is no guarantee that a Hedge Funds’ goals, objectives, benchmarks or targeted returns will be achieved or reached.
- Hedge Funds may have little or no operating history or performance and may use hypothetical or pro forma performance which may not reflect actual trading done by the manager or advisor and such history or performance should be reviewed carefully. Investors should not place undue reliance on pro forma or hypothetical performance.
- A Hedge Fund and its managers/advisors may be subject to various conflicts of interest.
- A Hedge Fund and its managers/advisors may rely on the trading expertise and experience of third-party managers or advisors; the identity of which may not be disclosed to investors.
- A Hedge Fund is not required to provide periodic pricing or valuation information to investors and it may be the Hedge Fund’s practice to not provide such information.
- Strategies intended to hedge risk may be partly or wholly unsuccessful.
- Some Hedge Funds may use a single advisor or employ a single strategy, which could mean a lack of diversification and higher risk.
- Some Hedge Funds execute a portion, and in some cases a substantial portion, of trades on foreign exchanges or over the counter markets. Such trades could involve a higher degree of risk.
- An investment in a Hedge Fund may be illiquid and there may be significant restrictions on transferring interests in a Hedge Fund. There is no secondary market for an investor’s investment in a Hedge Fund and none is expected to develop.
- A Hedge Fund’s fees and expenses, which may be substantial regardless of any positive return, will offset the Fund’s trading profits.
- A Hedge Fund may involve a complex tax structure (which should be reviewed carefully) and delays in distributing important tax information.
- A Hedge Fund may not provide any transparency regarding its underlying investments (including sub-funds in a Fund of Funds structure) to investors. In such a case, there will be no way for an investor to discover or monitor the specific investments made by the Hedge Fund or, in a Fund of Funds structure, to know whether the sub-fund investments are consistent with the Hedge Fund’s investment strategy or risk parameters.
The above general summary is not a complete list of the risks and other important disclosures involved in investing in Hedge Funds and, with respect to any particular Hedge Fund, is subject to the more complete and specific disclosures contained in such Hedge Fund’s respective offering documents. Before making any investment, an investor should thoroughly review a Hedge Fund’s offering documents with the investor’s financial, legal and tax advisor to determine whether an investment in the Hedge Fund is suitable for the investor in light of the investor’s investment objectives, financial circumstances and tax situation.