A Limited Partner May Be Required to Withdraw its Capital
Under the Partnership Agreement, the General Partner may, in its sole discretion at any time, require any Limited Partner to withdraw all or a portion of such Limited Partner’s capital from the Fund. Such mandatory withdrawal may create adverse tax and/or economic consequences to the Limited Partner depending on the timing thereof, however, a Limited Partner will not be charged an early withdrawal fee in such circumstances, if otherwise applicable.
Absence of Certain Statutory Registrations
The Fund will not be registered as a management investment company under the 1940 Act, in reliance upon certain exemptions from such registration requirements. Accordingly, the Fund will not be subject to the various statutory and SEC regulatory requirements applicable to investment companies. For example, the Fund is not required to maintain custody of its securities or place its securities in the custody of a bank or a member of a U.S. securities exchange in the manner required of registered investment companies under rules promulgated by the SEC. The Fund generally will maintain such accounts at brokerage firms which do not separately segregate such assets as would be required in the case of registered investment companies. Under the provisions of the U.S. Securities Investor Protection Act, the bankruptcy of any such brokerage firms might have a greater adverse effect on the Fund than registered investment companies. The Investment Manager and certain of the Sub-Advisors are each registered with the SEC as investment advisers under the Advisers Act. Such registration, or other regulations that may in the future be adopted could adversely affect the Fund or create additional costs and expenses for the Fund. It is possible in the future that the regulatory environment for hedge funds and their managers could change. This could result in new laws or regulations that could, for example, impose restrictions on the operation of the Fund, the Investment Manager, or the General Partner and their affiliates; impose disclosure or other obligations on those entities; or restrict the offering, sale or transfer of Interests. Accordingly, any such laws or regulations could adversely affect the investment performance of the Fund or its access to additional capital, create additional costs and expenses for the Fund or otherwise have an adverse impact on the Fund and its Partners.
The Investment Manager and the General Partner are exempt from registration with the Commodity Futures Trading Commission (“CFTC”) as commodity pool operators pursuant to CFTC Rule 4.13(a)(3) with respect to the Fund. In addition, by virtue of its reliance on CFTC Rule 4.13(a)(3), the Investment Manager is exempt pursuant to CFTC Rule 4.14(a)(5) from registration with the CFTC as a commodity trading advisor with respect to advice it provides to the Fund. Therefore, unlike a registered commodity pool operator, neither the Investment Manager nor the General Partner is required to deliver a disclosure document and a certified report to the Partners of the Fund.
Active Management Risk
The Strategies are actively managed and may not meet their investment objective if the statistical analyses fail to identify the direction or strength of market movements or based on the adviser’s success or failure to implement investment strategies for portfolios. The Strategies may invest in complex instruments, including options and leveraged, inverse or inverse-leveraged ETFs. Such instruments may create enhanced risks for the Strategies, and the adviser’s ability to control the Strategies’ level of risk will depend on the adviser’s skill in managing such instruments.
American Depository Agreements (ADRs)
U.S. dollar-denominated American Depository Receipts (ADRs) are traded in the United States on exchanges or over the counter and are issued by domestic banks. ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all the risk inherent in investing in the securities of foreign issuers. ADRs offer U.S. investors a convenient way to invest in foreign companies, but they also have risks, including: currency risk, as ADRs are denominated in U.S. dollars while the underlying assets are priced in foreign currencies, making them vulnerable to exchange rate fluctuations; political and economic instability in the issuing company’s home country which can also impact the value of ADRs, such as where geopolitical events led to delisting or restricted access to underlying shares; and regulatory differences between the U.S. and the foreign country which may affect transparency and investor protections. Holders of ADRs may also face tax risks, including foreign withholding taxes on dividends, which vary depending on tax treaties and proper documentation. Furthermore, liquidity risk can arise if the ADR is thinly traded or listed only over-the-counter, potentially making it harder to buy or sell shares efficiently.
Cash and Cash Equivalents Risk
Holding cash or cash equivalents rather than securities or other instruments in which the Strategies primarily invest, even strategically, may cause the Strategies to risk losing opportunities to participate in market appreciation, and may cause the Strategies to experience potentially lower returns than the Strategies’ benchmark or other strategies that remain fully invested. In rising markets, holding cash or cash equivalents may negatively affect the Strategies’ performance relative to their benchmark.
Concentration of Investments
The Fund intends to hold a concentrated portfolio of securities, which could expose the Fund to significantly greater volatility than a more diversified portfolio. Although the Fund has certain self-imposed guidelines, there is no limit on the amount of the Fund’s assets that can be invested in any particular position; therefore, a loss in any single position could materially reduce the Fund’s assets. In addition, the value of the Fund’s investment positions may decrease as a result of general economic conditions and/or an adverse event related to one or more of the companies in which the Fund is invested. Furthermore, new legislation or changes in governmental regulations could adversely affect the Fund’s ability to engage in certain investment strategies. The Fund does not intend to hold a diversified portfolio. This lack of diversification may expose the Fund to substantial losses in the event one or more concentrated positions experience substantial losses.
Counterparty Risk
Some of the markets in which the Fund may effect transactions are “over-the-counter” or “interdealer” markets. The participants in such markets are typically not subject to the credit evaluation and regulatory oversight to which members of “exchange–based” markets are subject. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Fund to suffer a loss. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Fund has concentrated its transactions with a single or small group of counterparties. Counterparties in foreign markets face increased risks, including the risk of being taken over by the government or becoming bankrupt in countries with limited if any rights for creditors. The Fund is not restricted from concentrating any or all of their transactions with one counterparty. The ability of the Fund to transact business with any one or number of counterparties and the absence of a regulated market to facilitate settlement may increase the potential for losses.
Data Risk
The Strategies’ investments are heavily dependent on proprietary statistical analyses that include the use of information and data supplied by third parties (“Data”). When Data proves to be incorrect or incomplete, any decisions made in reliance thereon may lead to the inclusion or exclusion of investments that would have been excluded or included had the Data been correct and complete.
Dependence on Sub-Advisors and Limited Authority of Investment Manager
Although the General Partner has the ultimate authority and responsibility for the management of the Fund, all decisions relating to the day-to-day investment of the Fund’s assets and the amount of leverage to be used have been delegated to, and will be made by, the Investment Manager and the Sub-Advisors. Therefore, the success of the Fund will depend primarily upon the ability of (i) the Investment Manager to develop and implement investment policies and risk controls; (ii) the Investment Manager to initially allocate and then rebalance the Fund’s assets between the Sub-Advisors and (iii) each Sub-Advisor to develop and implement investment strategies that achieve their respective investment objectives. Subjective decisions made by the Investment Manager or the Sub-Advisors may cause the Fund to incur losses or to miss profit opportunities on which it would otherwise have capitalized. Although the Investment Manager will evaluate the ability and strategy of each Sub-Advisor, it will not typically cause the Sub-Advisors to take or not to take specific actions. The Investment Manager, the Sub-Advisors and their affiliates may engage in other business activities, including the management of other investment funds. Accordingly, they will not devote their full time and attention to the operations of the Fund. If (i) any of the Investment Manager’s senior executives cease to be responsible for the management of the Fund, or (ii) any of the Sub-Advisors cease to be responsible for the management of their respective Account, the business of the Fund may be materially and adversely affected.
Derivatives Risk
The Strategies that invest in derivative investments have risks, including the imperfect correlation between the value of such instruments and the underlying assets or index; the loss of principal, including the potential loss of amounts greater than the initial amount invested in the derivative instrument; and illiquidity of the derivative investments. The derivatives used by the Strategies that invest in derivitaves may give rise to a form of leverage. Leverage magnifies the potential for gain and may result in greater losses. To the extent the Strategies invest in such derivative instruments, the value of the Strategies’ portfolios is likely to experience greater volatility over short-term periods.
Equity Market Risk
Certain of the Strategies have exposure to common stocks through their investments in equity index-linked instruments. Common stocks are generally exposed to greater risk than other types of securities, such as preferred stock and debt obligations, because common stockholders generally have inferior rights to receive payment from specific issuers. Equity securities may experience sudden, unpredictable drops in value or long periods of decline in value. This may occur because of factors that affect securities markets generally or factors affecting specific industries, sectors, or companies in which these Strategies directly or indirectly invest. In addition, local, regional, or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues (such as the global pandemic caused by the COVID-19 virus), recessions, rising inflation, or other events could have a significant negative impact on these Strategies and their investments. Such events could adversely affect the prices and liquidity of these Strategies’ portfolio securities or other instruments and could result in disruptions in the trading markets.
ETF Risk
An ETF is an investment fund traded on stock exchanges, similar to stocks. Investing in ETFs carries the risk of capital loss (sometimes up to a 100% loss in the case of a stock holding bankruptcy). Areas of concern include the lack of transparency in products and increasing complexity, conflicts of interest and the possibility of inadequate regulatory compliance. Precious Metal ETFs (e.g., Gold, Silver, or Palladium Bullion backed “electronic shares” not physical metal) specifically are negatively impacted by several unique factors, among them (1) large sales by the official sector which own a significant portion of aggregate world holdings in gold and other precious metals, (2) a significant increase in hedging activities by producers of gold or other precious metals, and (3) a significant change in the attitude of speculators and investors.
ETN Risk
ETNs may be riskier than ordinary debt securities and may have no principal protection. The Strategies that hold ETNs may see that such a holding may be influenced by many unpredictable factors, including highly volatile commodities prices, changes in interest rates, and monetary and other governmental policies, action, and inaction. Investing in ETNs is not equivalent to investing directly in index components or the relevant index itself. Because ETNs are debt securities, they possess credit risk; if the issuer has financial difficulties or goes bankrupt, the investor may not receive the return it was promised.
Emerging Market Risk
Certain Strategies may invest in instruments or underlying funds that provide exposure to securities traded in developing or emerging markets, and individual securities with such exposure, may involve substantial risk with respect to such securities due to limited information; different accounting, auditing, and financial reporting standards; a country’s dependence on revenue from particular commodities or international aid; and expropriation, nationalization, or other adverse political or economic developments. Political and economic structures in many emerging market countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristics of more developed countries. Some of these countries may have failed to recognize private property rights in the past and, at times, have nationalized or expropriated the assets of private companies.
Fixed Income Risk
The value of the Strategies’ investments in fixed income securities will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of fixed income securities owned indirectly by the Strategies. On the other hand, if rates fall, the value of the fixed income securities generally increases. The Strategies may be subject to a greater risk of rising interest rates due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives. In general, the market price of fixed income securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities.
Force Majeure Risk
The Strategies may be affected by force majeure events (i.e., events beyond the control of the party claiming that the event has occurred, including, without limitation, acts of God, fire, flood, earthquakes, outbreaks of an infectious disease, pandemic or any other serious public health concern, war, terrorism, labor strikes, major plant breakdowns, pipeline or electricity line ruptures, failure of technology, defective design and construction, accidents, demographic changes, government macroeconomic policies, social instability, etc.). Some force majeure events may adversely affect the ability of a party to perform its obligations until it is able to remedy the force majeure event. These risks could cause personal injury or loss of life, damage property, or instigate disruptions of service. In addition, the cost to the Strategies of repairing or replacing damaged assets resulting from such force majeure event could be considerable. Force majeure events that are incapable of or are too costly to cure can have a permanently adverse effect on the Strategies. Certain force majeure events (such as war or an outbreak of an infectious disease) could also have a broader negative impact on the world economy and international business activity.
Fund Interests are Illiquid
Because of the limitations on withdrawals and the fact that Interests are not tradable, an investment in the Fund is relatively illiquid and involves a high degree of risk. A subscription for Interests should be considered only by sophisticated investors financially able to maintain their investment and who can afford to lose all or a substantial part of such investment. There is no public market for Interests in the Fund.
Futures Contracts Risk
A decision as to whether, when, and how to use futures involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the risks associated with all derivatives, the prices of futures can be highly volatile, using futures can lower total return, and the potential loss from futures can exceed the initial investment in such contracts and could be unlimited.
Geopolitical Risk
Risks outside of the financial markets, affect the markets and investments, often at times significantly. The occurrence of geopolitical events in recent years such as (but not limited to): Middle East instability; military conflict in Ukraine and surrounding areas, alleged cyber-attacks by Russia, China, and North Korea; ongoing epidemics of infectious diseases that can be spread within a country, region or globally; terrorist attacks in the U.S. and around the world; social and political discord; governmental debt crises, and strains on international relations between the U.S. and a number of foreign countries, including traditional allies; new and continued political unrest in various countries; changes in the U.S. Presidency and federal administration; can result in market volatility, have long-term effects on the U.S. and worldwide financial markets, and cause further economic uncertainties in the U.S. and worldwide.
Government Obligations Risk
The Strategies may invest in securities issued by the U.S. government or its agencies or instrumentalities. There can be no guarantee that the United States will be able to meet its payment obligations with respect to such securities. Additionally, market prices and yields of securities supported by the full faith and credit of the U.S. government or other countries may decline or be negative for short or long periods of time.
Hedging
The Fund may utilize a variety of financial instruments such as derivatives, options, swaps, repurchase and reverse repurchase agreements, forward contracts and futures contracts, both for investment purposes and for risk management purposes in order to: (i) protect against possible changes in the market value of the Fund’s investment portfolio resulting from fluctuations in the securities markets and changes in interest rates, (ii) protect the Fund’s unrealized gains in the value of the Fund’s investment portfolio, (iii) facilitate the sale of any such investments, (iv) establish a position as a temporary substitute for other securities, (v) enhance or preserve returns, spreads or gains on any investment in the Fund’s portfolio, (vi) hedge the interest rate or currency exchange rate on any of the Fund’s liabilities or assets, (vii) protect against any increase in the price of any securities the Fund anticipates purchasing at a later date or (viii) for any other reason that the Fund deems appropriate. There can be no assurance that such hedging strategies will be successful or that success of any hedging strategies will depend, in part, upon the ability to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the portfolio investments being hedged. Since the characteristics of many securities change as markets change or time passes, the success of the Fund’s hedging strategies will also be subject to its ability to continually recalculate, readjust and execute hedges in an efficient and timely manner. While the Fund may enter into hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance for the Fund than if it had not engaged in such hedging transactions. For a variety of reasons, the Fund may not seek to establish a perfect correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. The Fund may not hedge against a particular risk because it does not regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge, or because it does not foresee the occurrence of the risk.
High Portfolio Turnover Risk
Because certain of these Strategies may “turn over” some or all of their positions as frequently as daily, these Strategies may incur high levels of transaction costs from commissions or the bid/offer spread. Higher portfolio turnover may result in these Strategies paying higher levels of transaction costs and generating greater tax liabilities for investors. Portfolio turnover risk may cause these Strategies performance to be less than expected.
High Yield and Unrated Securities Risk
Certain Strategies may invest in underlying investments that primarily invest in high yield securities and unrated securities of similar credit quality (commonly known as “junk bonds”). Although high yield securities generally pay higher rates of interest than investment grade bonds, high yield securities are speculative, high risk investments that may cause income and principal losses for the Strategy or its underlying investments and, consequently, negatively affect the value of the strategy. High yield securities may be issued by companies that are restructuring, are smaller and less creditworthy, or are more highly indebted than other companies. This means that they may have more difficulty making scheduled payments of principal and interest. Changes in the value of high yield securities are influenced more by changes in the financial and business position of the issuing company than by changes in interest rates when compared to investment grade securities. Successful investment in high yield securities and unrated securities of similar quality involves greater investment risk and is highly dependent on the applicable investment adviser’s credit analysis. A Strategy’s exposure to high yield securities may subject it to a substantial degree of credit risk.
Highly Volatile Instruments
The prices of derivative instruments, including options and futures, can be highly volatile. Price movements of forward contracts and other derivative contracts in which the Fund’s assets may be invested are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies. In addition, governments from time to time intervene, directly and by regulation, in certain markets, particularly those in currencies and financial instrument options. Such intervention often is intended directly to influence prices and may, together with other factors, cause all of such markets to move rapidly in the same direction because of, among other things, interest rate fluctuations. The Fund also is subject to the risk of the failure of any of the exchanges on which its positions trade or of their clearinghouses.
Illiquid Securities
A portion of the Fund’s assets may be invested in illiquid or private securities. Such securities may have to be held for a substantial period of time before they can be liquidated, if at all. Market prices for such securities are often volatile and may not be ascertainable. The resale of restricted and illiquid securities often may have higher brokerage charges.
Investment Company Risk
The risks of investing in other investment companies typically reflect the risks of the types of instruments in which the investment companies invest. By investing in another investment company, the Strategy become a shareholder of that investment company and bear its proportionate share of the investment company’s fees and expenses. Investments in ETFs are subject to the “ETF Risk” described above.
Key Manager Risk
Client portfolios are dependent on the continued service and active trading efforts of its key managers and employees. If the services of any such key managers or employees with the advisor were to discontinue or lapse, client portfolios could be affected.
Lack of Insurance
The assets of the Fund are not insured by any government or private insurer except to the extent portions may be deposited in bank accounts insured by the Federal Deposit Insurance Corporation or with brokers insured by the Securities Investor Protection Corporation and such deposits and securities are subject to such insurance coverage. Therefore, in the event of the insolvency of a depository or custodian, the Fund may be unable to recover all of its funds or the value of its securities so deposited.
Lack of Transparency
Hedge funds are private investment funds that conform to certain requirements and are eligible for various exemptions from regulation. As such, they generally are not subject to reporting requirements, as well as regulatory restrictions on leverage or trading strategies. Although the Investment Manager regards information concerning its positions held or leverage used as confidential and proprietary, it is a proponent of increased transparency and will help to educate investors who would like to understand more about the Fund’s underlying positions.
Leveraged, Inverse, and Inverse-Leveraged ETFs Risk
Leveraged, inverse, and inverse-leveraged ETFs (collectively, “Leveraged ETFs”) expose certian of the Strategies to all of the risks that traditional ETFs present (see “ETF Risks” above). All Leveraged ETFs rely to some degree, often extensively, on derivatives to achieve their objectives and, thus, these Strategies are indirectly exposed to derivatives risk through the investments in Leveraged ETFs. Further, investments in Leveraged ETFs are subject to the risk that the performance of such ETF will not correlate with the underlying index as intended. Leveraged ETFs often “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets. Consequently, these investment vehicles may be extremely volatile and can potentially expose a Strategy to complete loss of its investment.
Leverage Risk
Certain of the Strategies may obtain investment exposure in excess of portfolio net assets by utilizing leverage and may lose more money in market conditions that are adverse to its investment objective than a strategy that does not utilize leverage.
Limitation of Liability and Indemnification of the General Partner and the Investment Manager
The Partnership Agreement provides that the General Partner and its affiliates shall be indemnified and held harmless from and against any loss or expense suffered or sustained in connection with the General Partner’s duties under the Partnership Agreement, so long as such loss or expense did not result from action or inaction adjudged to constitute fraud, gross negligence, willful misconduct or breach of fiduciary duty. The Investment Management Agreement provides that the Investment Manager and its affiliates shall be indemnified and held harmless by the Fund from and against any loss or expense suffered or sustained in connection with the Investment Manager’s duties under the Investment Management Agreement, so long as such loss or expense did not result from action or inaction adjudged to constitute fraud, gross negligence, willful misconduct or breach of fiduciary duty. Therefore, a Limited Partner may have a more limited right of action against the General Partner or the Investment Manager than a Limited Partner would have had absent these provisions. It is the policy of the SEC that indemnification for violations of securities laws is against public policy and is therefore unenforceable.
Limitations on Limited Partner Withdrawals and Transfers
A Limited Partner generally will not be permitted, without penalty, to withdraw any portion, or all, of its capital account balances from the Fund except as of the last business day of each calendar quarter, upon at least forty-five (45) days’ prior written notice, provided that such Limited Partner’s capital account has been in existence for at least twelve (12) months as of the effective date of withdrawal. A Limited Partner may withdraw all or any part of its capital account balance at certain other times, however, withdrawals on dates other than those specified in the immediately preceding sentence generally will be subject to a withdrawal fee (subject to waiver), which will reduce a Limited Partner’s overall return on investment.
If withdrawal and redemption requests are received by the General Partner for any Withdrawal Date in an aggregate amount exceeding 25% of the net asset value of the Fund as of such Withdrawal Date, the General Partner may, in its sole discretion, limit the withdrawals by each Limited Partner (on a pro rata basis with each other withdrawing Limited Partner and with each redeeming shareholder in the Fund) and, along with the Investment Manager, use commercial best efforts to effect, prior to the next Withdrawal Date, such withdrawal requests as to not materially disadvantage the other Limited Partners in the Fund. Unsatisfied withdrawal requests carried over from the prior calendar month or quarter end, as the case may be, shall be added to the initial withdrawal requests on such next Withdrawal Date for purposes of calculating the 25% limitation described herein. Limited Partner requests for rebalancing withdrawals (as described below) shall not be added to other withdrawal requests for purposes of calculating the 25% limitation.
The General Partner may suspend withdrawal rights (including the payment of withdrawal proceeds), in whole or in part, when there exists in the opinion of the General Partner a state of affairs where the disposal of the Fund’s assets, or the determination of the value of the Limited Partner’s capital accounts, would not be reasonably practicable or would be seriously prejudicial to the non-withdrawing Limited Partners or if required under any applicable anti-money laundering laws or regulations. Additionally, the Fund’s obligation to fulfill a withdrawal request is subject to the Fund’s commercial best efforts, including without limitation, the availability of liquid assets managed by each Sub-Advisor. Transfers of Interests will be permitted only in limited circumstances at the discretion of the General Partner. Accordingly, Interests should only be acquired by investors willing and able to commit their funds for an appreciable period of time. Potential investors should consider their liquidity needs before investing. A significant withdrawal of capital from the Fund may cause a temporary imbalance in its Portfolio, which may adversely affect the remaining Limited Partners.
Limited Reporting
The Fund will provide monthly unaudited reports of Fund’s activity. As a result, Limited Partners will not be able to evaluate the Fund’s activity at shorter intervals. Additionally, as a result of questions, due diligence requests, meetings or other communications, certain Limited Partners may receive information that is not generally available or otherwise provided to other Limited Partners, which may affect such Limited Partners’ decision to request a withdrawal of their respective capital accounts or take other actions on the basis of such information.
Loans of Portfolio Securities
The Fund may lend its portfolio securities. By doing so, the Fund attempts to increase income through the receipt of interest on the loans. In the event of the bankruptcy of the other party to a securities loan, the Fund could experience delays in recovering the loaned securities. To the extent that the value of the securities the Fund lent has increased, the Fund could experience a loss if such securities are not recovered.
Maintenance of Multiple Capital Accounts
Each capital contribution made by a Limited Partner will be, initially, deemed to be credited to a separate capital account (and corresponding sub-account) for purposes of tracking the Performance Allocation, the Recovery Period, and the Soft-Lock Period applicable to such capital contribution. Accordingly, it is possible that a Limited Partner that makes additional capital contributions to the Fund will be subject to a Performance Allocation with respect to a capital account even though such Limited Partner’s overall investment in the Fund has been unprofitable due to losses incurred with respect to such Limited Partner’s other capital account(s).
Mortgage and Asset-Backed Securities Risk
Certain Strategies may invest in underlying investments that principally invest in mortgage- and asset-backed securities. Such securities are subject to credit, interest rate, prepayment, and extension risks. These securities also are subject to risk of default on the underlying mortgage or asset, particularly during periods of economic downturn. Small movements in interest rates may quickly and significantly reduce the value of certain mortgage-backed securities.
Non-US Securities Risk
Non-US securities present certain risks such as currency fluctuation, political and economic change, social unrest, changes in government regulation, differences in accounting and the lesser degree of accurate public information available.
Operating History
Although the Investment Manager and the Sub-Advisors have substantial investment experience, the Fund has no operating history upon which a prospective investor may base its investment decision. The past investment performance of the Investment Manager, the Sub-Advisors and their affiliates for other accounts may not be construed as an indication of the future results of an investment in the Fund. The Fund’s investment program should be evaluated on the basis that there can be no assurance that the Investment Manager’s or the Sub-Advisors’ assessment of the short-term or long-term prospects of investments will prove accurate or the Fund will achieve its investment objectives. The Fund, as a whole may, in fact, incur significant losses.
Operational Risks
The volume and complexity of the Fund’s transactions may place substantial burdens on the Investment Manager’s and/or the Sub-Advisors’ operational systems and resources, including those related to trade entry and execution, position reconciliation, corporate actions, marking procedures, finance, accounting, profit and loss reporting, internal management and risk reporting and funds transfers. Human error, system failure or other problems with any of these processes could result in material losses or costs, which will generally be borne by the Fund.
Option Risk
Options are used as part of certain Strategies. An option is a contract to buy or sell a specific financial product known as the option’s underlying instrument or underlying interest. For equity options, the underlying instrument is a stock, ETF, or similar product. The contract establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. It also has an expiration date. When an option expires, it no longer has value and no longer exists.
Options come in two varieties, calls and puts. Call contracts will expire worthless if the underlying security closes below the strike price on expiration. Put contracts will expire worthless if the underlying security closes above the strike price on expiration.
Special tax rules may apply, depending on the outcome. Please read Characteristics and Risks of Standardized Options. Copies of this document may be obtained from the exchange on which options are traded, on the web at www.optionsclearing.com/components/docs/riskstoc.pdf or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (l-888-678-4667).
Buying options is a speculative activity and entails greater than ordinary investment risks. Options enable certain of the Strategies to purchase exposure that is significantly greater than the premium paid. Consequently, the value of such options can be volatile, and a small investment in options can have a large impact on the performance of certain of the Strategies. These Strategies risk losing all or part of the cash paid (premium) for purchasing options. Even a small decline in the value of a reference asset underlying call options or a small increase in the value of a reference asset underlying put options can result in the entire investment in such options being lost. Additionally, the value of the option may be lost if the investment adviser fails to exercise such option at or prior to its expiration.
These Strategies may sell options in order to obtain additional income from premiums paid by the option buyer. Option writing is often associated with the investment strategy known as covered call writing. Selling a covered call may limit the upside if the underlying security closes above the strike price on expiration.
Other Derivative Investments
Derivative instruments, or “derivatives,” include futures, options, swaps, structured securities and other instruments and contracts that are derived from or the value of which is related to one or more underlying securities, financial benchmarks, currencies or indices. Derivatives allow an investor to hedge or speculate upon the price movements of a particular security, financial benchmark, currency, or index at a fraction of the cost of investing in the underlying asset. The value of a derivative depends largely upon price movements in the underlying asset. Therefore, many of the risks applicable to trading the underlying asset are also applicable to derivatives of such asset. However, there are a number of other risks associated with derivatives trading. For example, because many derivatives are leveraged, and thus provide significantly more market exposure than the money paid or deposited when the transaction is entered into, a relatively small adverse market movement may not only result in the loss of the entire investment but may also expose the Fund to the possibility of a loss exceeding the original amount invested. Derivatives may also expose investors to liquidity risk, as there may not be a liquid market within which to close or dispose of outstanding derivatives contracts.
Preferred Securities Risk
Certain Strategies may invest in underlying investments that invest in preferred stocks. Preferred stocks are subject to the risks of equity securities generally and also risks associated with fixed-income securities, such as interest rate risk. A company’s preferred stock generally pays dividends only after the company makes required payments to creditors. As a result, the value of a company’s preferred stock will react more strongly than bonds and other debt to actual or perceived changes in the company’s financial condition or prospects. Preferred stock may be less liquid than many other types of securities, such as common stock, and generally has limited or no voting rights. In addition, preferred stock is subject to the risks that a company may defer or not pay dividends, and, in certain situations, may call or redeem its preferred stock or convert it to common stock.
Reserves
Under certain circumstances, the Fund may find it necessary to establish a reserve for contingent liabilities or withhold a portion of the Limited Partner’s proceeds at the time of withdrawal. If the reserve is subsequently determined to have been excessive, such excess amount shall be returned to the net assets of the Fund, but the amount paid upon a prior withdrawal will not be adjusted. Conversely, if the reserve is subsequently determined to have been insufficient, the net assets of the Fund will be used to pay such amounts and the Fund shall have no right to recover any excess withdrawal proceeds from a Limited Partner. As the establishment of a reserve impacts the determination of the Fund’s net asset value, an incorrect reserve will impact the subscription prices for Interests purchased by Limited Partners.
Risks of Sub-Advisors
Although each Sub-Advisor will trade the assets in the Fund’s prime broker account, the Investment Manager has delegated security selection to the Sub-Advisors. The Investment Manager will monitor the activities of the Sub-Advisors on a regular basis and periodically discuss with such Sub-Advisors the performance of their respective Account. The Investment Manager’s final recourse if a Sub-Advisor is not performing as expected or if other circumstances occur with respect to a Sub-Advisor (including, without limitation, a change in key management or deviation from the Sub-Advisor’s intended investment strategy) is to terminate the Sub-Advisor. A Sub-Advisor may resign as a Sub-Advisor under certain conditions. Limited Partners will be notified as soon as practical if an additional or replacement Sub-Advisor is selected.
Short Position Risk
Certain of the Strategies may engage in short position derivative activities which are significantly different from the investment activities commonly associated with conservative stock or bond strategies. Short positions in derivatives are speculative and more risky than “long” positions (purchases) because the upside of the underlying index is, in theory, unlimited. Therefore, the potential loss on an uncovered short derivative, such as a call option, is, in theory, unlimited; whereas the potential loss on long positions is limited to the original purchase price. You should be aware that any strategy that includes short positions could suffer significant losses.
Soft Dollars
The use of brokerage commissions to obtain research services creates a conflict of interest between the Investment Manager, the Sub-Advisors and the Fund. This may result in the Fund paying higher brokerage commissions than might be paid if transactions were effected through brokers that do not provide such services. To the extent that the Investment Manager and/or the Sub-Advisors are able to acquire these products and services without expending their own resources or at reduced prices, the Investment Manager’s and/or the Sub-Advisors use of “soft-dollars” would tend to increase their profitability. In addition, the availability of these non-monetary benefits may influence the Investment Manager and/or the Sub-Advisors to select one broker rather than another to perform services for the Fund. It is anticipated that the Investment Manager’s and certain Sub-Advisor’s use of commissions or “soft dollars” to pay for research products or services will fall within the safe harbor created by Section 28(e) of the Exchange Act; provided, however, that one or more Sub-Advisors will use commissions or “soft dollars” to pay for expenses and/or other items that fall outside of the safe harbor created by Section 28(e).
Short Sales
“Short sales” are sales of securities the Fund borrows but does not actually own, usually made with the anticipation that the prices of the securities will decrease and the Fund will be able to make a profit by purchasing the securities later at the lower prices. The Fund will incur a loss on a short sale if the price of the security increases prior to the time the Fund purchases the security to replace the borrowed security. A short sale presents substantially greater risk than purchasing a security outright since there is no ceiling on the possible cost of replacing the borrowed security, whereas the risk of loss on a “long” position is limited to the purchase price of the security. Closing out a short position may cause the security to rise further in value creating a greater loss. In addition, the ability to continue borrowing the security is not guaranteed. If the short seller loses the ability to continue borrowing the security, a “buy-in” may occur, forcing the short seller to purchase the security at an inopportune moment. There can be no assurance that securities necessary to cover a short position will be available for purchase.
Small-Cap Risks
A significant portion of the Fund’s investment strategy is investing in, and shorting, securities of small-cap to mid-cap issuers which may offer the potential for greater capital appreciation than investments in securities of large-cap issuers. Securities of small and mid-cap issuers may also present greater risks. For example, small-cap issuers may have limited product lines, markets, or financial resources. They may be subject to high volatility in revenues, expenses and earnings. Their securities may be thinly traded, may be followed by fewer investment research analysts and may be subject to wider price swings and thus may create a greater chance of loss than when investing in, or shorting, securities of larger-cap issuers. The market prices of securities of small-cap issuers generally are more sensitive to changes in earnings expectations, to corporate developments and to market rumors than are the market prices of large-cap issuers. Transaction costs in securities of small-cap issuers are generally higher than in those of large-cap issuers.
Spread Position May Be Riskier
A “spread” position may not be less risky than a simple “long” or “short” position.
Stop Loss May Not Be Effective
The placement of contingent orders by the Investment Manager and/or Sub-Advisors, such as a “stop-loss” or “stop-limit” orders, will not necessarily limit the Fund’s losses to the intended amounts, since market conditions may make it impossible to execute such orders.
Stop Loss May Not Be Effective
The placement of contingent orders by the Investment Manager and/or Sub-Advisors, such as a “stop-loss” or “stop-limit” orders, will not necessarily limit the Fund’s losses to the intended amounts, since market conditions may make it impossible to execute such orders.
The Fund will not be Registered Under the CEA
The General Partner believes that the Fund is not a commodity pool for purposes of the CEA, and that the General Partner is not subject to regulation by the CFTC as a commodity pool operator or a commodity trading advisor in connection with the operation of the Fund. Consequently, Limited Partners will not have the regulatory protections provided to investors in CEA-regulated instruments or commodity pools.
Tips Risk
Certain Strategies may invest in underlying investments that invest in TIPS. Interest payments on TIPS are unpredictable and will fluctuate as the principal and corresponding interest payments are adjusted for inflation. There can be no assurance that the Consumer Price Index (“CPI”) will accurately measure the real rate of inflation in the prices of goods and services. In addition, TIPS are subject to credit risk and interest rate risk.
Transaction Execution and Costs
As the Fund’s portfolio will be actively managed, purchases and sales of investments may be frequent and may result in higher transaction costs to the Fund. In addition, in many cases relatively narrow spreads may exist between the prices at which the Fund will purchase and sell particular positions. The successful application of the Fund’s investment strategy will therefore depend, in part, upon the quality of execution of transactions, such as the ability of broker-dealers to execute orders on a timely and efficient basis. Although the Fund will seek to utilize brokerage firms that will afford superior execution capability to the Fund, there is no assurance that all of the Fund’s transactions will be executed with optimal quality. Furthermore, due to the degree of trading, total commission charges and other transaction costs may be expected to be high and adverse tax consequences may result to the limited partners. The level of commission charges, as an expense of the Fund, may therefore be expected to be a factor in determining future profitability of the Fund.
Undervalued Equity Securities
Each Account may invest in securities that are not properly valued. Opportunities in undervalued equity securities arise from market inefficiencies or because of a lack of wide recognition of the potential impact (positive or negative) that specific events or trends may have on the value of a security. The identification of investment opportunities in undervalued securities is a difficult task, and there is no assurance that such opportunities will be successfully recognized or acquired. While investments in undervalued securities offer the opportunities for above-average capital appreciation, these investments involve a high degree of financial risk and can result in substantial losses.
Valuation
Valuations of the Fund’s securities and other investments, such as options, may involve uncertainties and judgmental determinations, and if such valuations should prove to be incorrect, the net asset value of the Fund could be adversely affected. Certain of the Fund’s investments may not be listed on established exchanges which may make accurately determining the fair market value of such securities difficult. Furthermore, even for listed securities, the General Partner may, after consultation with the Investment Manager and the relevant Sub-Advisor, determine that the listed prices of the securities as determined in accordance with the valuation procedures set forth in the Partnership Agreement do not reflect the actual value of the securities and the General Partner may make such appropriate and reasonable modifications thereto to reflect the value of the securities, including to reflect liquidity conditions or other factors affecting such value. Third-party pricing information may at times not be available regarding certain securities. Valuation determinations made by the General Partner, which will be conclusive and binding, may affect the amount of the Management Fee, the Performance Allocation and withdrawal proceeds.
VIX Correlation and Volatility Risk
Certain of the Strategies hold derivative investments that are linked to equity market volatility levels can be highly volatile and may experience large gains and losses. Trading in VIX Index futures contracts or VIX Index options, particularly contracts that are close to expiration, can be very volatile and can be expected to be very volatile in the future. The volatile nature of these instruments may have an adverse impact on these Strategies beyond the impact of any changes in the VIX Index. Additionally, the correlation between the VIX Index and equities is variable and may not be sufficiently negative to act as an effective hedge against equity market declines.
Volatility Risk
Certain Strategies invest in derivative investments that are linked to equity market volatility levels which can be highly volatile and may experience large losses. Trading in VIX Index futures contracts or VIX Index options, particularly contracts that are close to expiration, can be very volatile and can be expected to be very volatile in the future. The volatile nature of these instruments may have an adverse impact on the strategy beyond the impact of any changes in the VIX Index.
