While concentrated approaches have a role to play for many clients, we think extension strategies represent potentially powerful alternatives for those looking for more alpha without introducing higher tracking risk or for those who wish to fine-tune their passive exposures or large-cap core allocations.
ASSOCIATED RISKS
Market risk – expected to have a market-like risk profile; invest in both long and short positions; will experience equity-like volatility; at times, markets experience significant volatility and unpredictability.
Leverage risk – use of leverage may increase the magnitude of investment losses; use of leverage exposes the portfolio to a higher degree of additional risk, including (i) greater losses from investments than would otherwise have been the case had leverage not been used to make the investments, (ii) margin calls that may force premature liquidations of investment positions.
Liquidity risk – may invest in small-capitalization companies; investments with low liquidity can have significant changes in market value, and there is no guarantee that these securities could be sold at fair value.
Derivatives risk – may use futures, swaps, options, forwards and other instruments on equities.
Counterparty risk – counterparty exposure for over-the-counter derivatives transactions.
Transparency risk – holdings and other data is limited, and, thus, less transparent than certain other investments.
Regulatory risk – not subject to the same regulatory requirements as mutual funds or many other pooled investments.
Emerging markets risk – investments in emerging and frontier countries may present risks such as changes in currency exchange rates; less liquid markets and less available information; less government supervision of exchanges, brokers, and issuers; increased social, economic, and political uncertainty; and greater price volatility. These risks are likely significantly greater relative to developed markets.
Equity market risks – equity markets are subject to many factors, including economic conditions, government regulations, market sentiment, local and international political events, and environmental and technological issues.
Manager risk – investment performance depends on the portfolio management team and the team’s investment strategies. If the investment strategies do not perform as expected, if opportunities to implement those strategies do not arise, or if the team does not implement its investment strategies successfully, an investment portfolio may underperform or suffer significant losses.
Short sale risks – a short sale exposes the investor to the risk of an increase in market price of the particular investment sold short, which could result in an inability to cover the short position and a theoretically unlimited loss.
Smaller-capitalization stock risk – the share prices of small and mid-cap companies may exhibit greater volatility than the share prices of larger capitalization companies. In addition, shares of small and mid-cap companies are often less liquid than larger capitalization companies.
Real estate securities risk – risks associated with investing in the securities of companies principally engaged in the real estate industry such as Real Estate Investment Trust (“REIT”) securities include: the cyclical nature of real estate values; risk related to general and local economic conditions; overbuilding and increased competition; demographic trends; and increases in interest rates and other real estate capital market influences.
Risks of derivative instruments – derivatives can be volatile and involve various degrees of risk. The value of derivative instruments may be affected by changes in overall market movements, the business or financial condition of specific companies, index volatility, changes in interest rates, or factors affecting a particular industry or region. Other relevant risks include the possible default of the counterparty to the transaction and the potential liquidity risk with respect to particular derivative instruments. Moreover, because many derivative instruments provide significantly more market exposure than the money paid or deposited when the transaction is entered into, a relatively small adverse market movement can not only result in the loss of the entire investment, but may also expose a portfolio to the possibility of a loss exceeding the original amount invested.
Risks of investment in other pools – investors in a fund that has invested in another fund will be subject to the same risks, in direct proportion to the amount of assets the first fund has invested in the second, as direct investors in that second fund.
Other risks – a security issued by a particular issuer may be impacted by factors that are unique to that issuer and thus may cause that security’s return to differ from that of the market; fund manager has total trading authority over the fund. The use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk; there may be restrictions on transferring interests in the fund; a substantial portion of the trades executed for the fund take place on non-US exchanges; the fund is not required to provide periodic pricing or valuation information to investors; the fund may involve complex tax structures and delays in distributing important tax information.