INDEX OF DEFINED TERMS - Banca di Legnano

Level: 2 – From: 2 – Wednesday, July 21, 2010 – 11:55 – eprint6 – 4247 Section 02
Risk Factors
asset is removed, the loss carried forward by such fund’s trading is eliminated for purposes of
calculating subsequent performance compensation due to the fund manager of any
replacement underlying asset. Thus, there may be substantial incentive compensation due to
the relevant fund manager even during a period when the portfolio of assets is incurring
significant losses.
• Concentration risk: As many hedge funds have the authority to concentrate their investments
in securities of a single issuer or industry, the overall adverse impact on one or more
components of the fund, and correspondingly on the value of the fund, of adverse movements
in the value of such securities could be considerably greater than if the fund were not
permitted to concentrate their investments. Moreover, a number of hedge funds included as
components in a fund might accumulate substantial positions in the same or related
instruments at the same time. As information regarding the actual investments made by such
funds is not generally available, the management company will be unable to identify any
such accumulations, which could expose the relevant fund to the risk of sudden and severe
declines.
• Risks of leverage: A fund may borrow without limitation and typically utilize various lines of
credit and other forms of leverage. In addition, certain of a fund’s investment strategies
(primarily those utilizing derivative instruments) may involve indirect forms of leverage.
While leverage presents opportunities for increasing a fund’s total return, it increases the
potential risk of loss as well. Any event which adversely affects the value of an investment by
a fund is magnified to the extent that such investment is leveraged. Leverage can have a
similar effect on issuers in which a fund invests. The use of leverage by a fund could result in
substantial losses which would be greater than if leverage had not been used. A fund’s assets
may be further leveraged or hedged by the use of derivatives. In addition, investments of a
fund may include investments in partnerships and other pooled investment vehicles, which
themselves employ leverage to a significant extent. Such investments are subject to the same
leverage risks as described above and a fund could lose its entire investment. As a general
matter, the banks and dealers that provide financing to a fund can apply essentially
discretionary margin, haircut, financing and security and collateral valuation policies.
Changes by banks and dealers in these policies may result in large margin calls, loss of
financing and forced liquidations of positions at disadvantageous net asset values.
• Non-deductible taxes: As funds may be resident in so-called off-shore jurisdictions, which
have not entered into any double taxation conventions with other countries, any income of
such fund may be subject to taxation in the countries of origin. As such withholding taxes are
non-deductible due to the fact that such funds are not subject to income taxation in their
countries of residence, the fund’s net income may be reduced which may have a negative
impact on the performance of such fund.
• Investment criteria: It may be difficult to specify precisely or comprehensively the strategies
of a fund. As a result, it may not sometimes be clear whether or not a fund fulfils the
investment criteria set out in its offering document.
• Risks of equity investments: The investment orientation of a fund may be based to a
significant extent on equity investments. Investment in equity securities to aggressively seek
capital appreciation is speculative and is generally perceived to encompass greater risks than
those involved in connection with an investment in debt securities of comparable issuers.
• Risks of fixed income investments: A fund may invest in fixed income securities and,
therefore, may be exposed to the risk of default by the issuers of such securities. Such default
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