General Risks Disclosure for Hedge Funds
Investors should note that investment involves risks. The risk considerations in relation to funds as set out below are not intended to be exhaustive. Investors should refer to the relevant offering documents/ prospectus for details of the product features and risk factors.
Principal is at risk
General risks of investing in funds
Fund investment is not the same as placing a bank deposit and thus should not be considered as alternative of normal time deposit. Different funds involve different risks. Some funds such as hedge funds may be subject to additional / higher risks.
General risks involved in fund investment include but are not limited to market risk, interest rate risk, liquidity risk, political risk and policy risk. The fund which invests in bonds is also exposed to risks involved in bonds, including but not limited to default or credit risk, interest rate risk, exchange rate risk and liquidity risk.
Past performance may not be indicative of or guarantee future performance and the prices of fund may go up as well as down. Customers may lose part or all of his / her investment principal.
For a fund which involves derivatives, investments of the fund are subject to, among other risks, counterparty and credit risks of the issuers of such derivatives. Insolvency of and/or default in payment by counterparty in a derivative transaction with the fund would adversely affect the value of the fund’s assets and the fund’s ability to meet its payment obligations.
Secondary market and liquidity risk
Some investments may not have active secondary markets. Investors It may be difficult to sell the units/shares of a fund if the fund does not offer a frequent and regular dealing day. Some investments in a fund may become illiquid (for example, over-the counter or unlisted securities), and are subject to lower liquidity. Liquidity risk represents a fund not able to sell or buy these investments quickly enough to prevent or minimize a loss in the fund. If a transaction is particularly large and the relevant market is illiquid, purchases and sales of the fund may take longer than would otherwise be expected and transactions may need to be conducted at unfavorable prices. Investors must be prepared to hold the fund for a longer than expected time horizon.
Interest rate risk
A fund may carry interest rate risk. Changes in interest rates will impact the performance of the fund. Interest rates tend to change suddenly and unpredictably.
Foreign exchange risk
A fund may carry foreign exchange risk. Changes in the values between investors’ home currency and the fund’s currency, and changes in the values between the fund’s currency and investors’ local currency may impact the performance of the fund and the investment return. Foreign exchange rates may change suddenly and unpredictably.
Mark-to-market risk
The market value of a fund is expected to fluctuate significantly according to various factors including but not limited to the financial, political, economic and other events. If the fund does not offer a frequent and regular dealing day, investors seeking to sell the fund prior to maturity may be subject to the prevailing market value which may be substantially less than the original purchase price.
Conflicts of interest
Various potential and actual conflicts of interest may arise from the overall investment activities or the roles of the parties involved in any investment product or transaction, their investment professionals and/or their affiliates. In particular, the counterparty / issuer / provider or its related entities or affiliates can offer or manage other investments which interests may be different to the interest of your investments in that investment product or transaction; or for cases where the product counterparty or issuer is BNP Paribas or its related entity or affiliate, BNP Paribas may also act as distributor, guarantor, calculation agent and/or arranger of the same product.
Equity risk
Equity markets may fluctuate significantly with prices rising and falling sharply, and this will have a direct impact on the net asset value of a fund with equity as part of the underlying. When equity markets are extremely volatile, the fund’s net asset value may fluctuate substantially and the fund could suffer substantial loss.
Risks associated with hedge funds
Hedge funds operate in a less regulated environment. Hedge funds use alternative investment strategies and the risks inherent in hedge funds are not typically encountered in traditional funds.
Hedge funds are less liquid
Hedge funds have imperfect transparency and less frequent pricing and reporting (typically monthly) and this makes investor due diligence, monitoring, performance tracking and reporting more complicated; some hedge funds may take leveraged positions or large positions in risky or less liquid investments which may be subject to significant market volatility.
The risk of any particular hedge fund will vary according to its strategy
Investors in hedge funds should keep in mind that these products can be highly speculative and may not be suitable for all clients. Investors should ensure that they understand the features of the products and fund strategies and the risks involved, before deciding whether or not to invest in such products.
These investments are generally intended for experienced and financially sophisticated investors who are willing and able to bear the risks associated with such investments, which can include: loss of all or a substantial portion of the investment; increased risk of loss due to leveraging, short-selling or other speculative investment practices; delays in tax reporting; prohibitions and/or material restrictions on transferring interests in the fund; and higher fees than funds.
Diversification does not assure profit nor protect against loss in a declining market.
Risks associated with funds that invest in financial derivative instruments
Investors should note the risks associated with investments in financial derivative instruments. Investors should NOT invest in the fund unless they fully understand and are willing to assume the risks associated with financial derivative instruments. The fund investing in financial derivative instruments is exposed to the credit, potential contagion and concentration risks of the counterparties who issued the financial derivative instruments, and the market value of any collateral held by the fund may have fallen substantially when the fund seeks to realize such collateral; and (ii) the fund may be exposed to higher liquidity risk if such financial derivative instruments do not have an active secondary market.
Risks associated with funds that invest in or are linked to bonds with loss-absorption features
Funds that invest mainly in, or whose returns are closely linked to the performance of, bonds or debt instruments (i.e. underlyings) with features of contingent write-down or conversion to ordinary shares on the occurrence of (1) when a financial institution is near or at the point of non-viability (PONV); or (2) when the capital ratio of a financial institution falls to a specified level, are considered as loss absorption products and would be subject to additional risks.
Investors should take note that such underlyings are subject to the risk of being written down or converted to ordinary shares (as the case may be). For Tier 1/Tier 2/Tier 3 bonds as underlyings, the loss absorption mechanism is triggered at PONV, whereas for Coco bonds as underlyings, the loss absorption mechanism is triggered with a mechanical trigger as specified in the prospectus or at PONV.
Regardless of the triggering mechanism in respect of the underlyings, it may potentially result in substantial losses to your investment. Please note that the priority of claims for reimbursement depends on the subordination hierarchy of the various capital and financing buffers in respect of the underlyings,a at which for example, the holders of subordinated debts are only repaid after the holders of senior debts have been fully reimbursed. Please take note that investing in underlyings with loss absorption features may potentially result in substantial losses. Accordingly, products investing in or are linked to such underlyings are high risk and complex, as the circumstances in which such products may be required to bear losses are difficult to predict and ex ante assessments of the quantum of losses will be highly uncertain. Such products are generally not suitable for retail investors.