Risk Disclosure

The National Futures Association (NFA) and CFTC (Commodity Future Trading Commission), the regulatory agencies for the forex and futures market in the United States and Canada, require that customers be informed about potential risks in the forex market. 

If you do not understand any of the information provided on this page please contact us or seek advice from a financial advisor. National Futures Association (NFA) and CFTC (Commodity Future Trading Commission), the regulatory agencies for the forex and futures market in the United States and Canada, require that customers be informed about potential risks in the forex market. If you do not understand any of the information provided on this page please contact us or seek advice from a financial advisor. 

Risks associated with Forex trading off-exchanges foreign currency trading on margin carry a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with off-exchange foreign currency trading and seek advice from an independent financial advisor if you have any doubts.

Any opinions, news, research, analyses, prices, or other information contained in this website and communications is provided as general market commentary and does not constitute investment advice. Zenith Capital Investments will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. Accuracy of Information and the content on any website associated with Zenith Capital Investments is subject to change at any time without notice and is provided for the sole purpose of assisting traders to make independent investment decisions. Zenith Capital Investments has taken reasonable measures to ensure the accuracy of the information in this Discord, however, does not guarantee its accuracy, and will not accept liability for any loss or damage that may arise directly or indirectly from the content or your liability to access the website, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through communication mediums.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS, UNLIKE AN ACTUAL PERFORMANCE RECORE, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

Different financial instruments and products (Financial Instruments) involve different levels of exposure to risk and in deciding whether to trade in or purchase any Financial Instruments, potential investors should take note of the following.

An investment in any Financial Instruments involves risks. These risks may include, among others, equity market, bond market, foreign exchange, interest rate, market volatility and economic, political and regulatory risks and any combination of these and other risks. Some of these risks are briefly discussed below.

Financial Instruments may decline in value and, where Financial Instruments are capital protected, investors should note that, whatever their investment in such Financial Instruments, the cash amount due at maturity will never be less than a specified minimum cash amount.

Where it is connected to an Underlying, an investment in any Financial Instrument should only be made after assessing the direction, timing and magnitude of potential future changes in the value of the relevant Underlying and/or in the composition and/or the method of calculation of the relevant Underlying, as the return of any such investment will be dependent, inter alia, upon such changes.

An investor in a Financial Instrument must generally be correct about the direction, timing and magnitude of an anticipated change in the value of the relevant Underlying. More than one risk factor may have simultaneous effect with regard to a Financial Instrument such that the effect of a particular risk factor may not be predictable. In addition, more than one risk factor may have a compounding effect which may not be predictable. No assurance can be given as to the effect that any combination of risk factors may have on the value of a Financial Instrument.

Financial Instruments linked to an Underlying represent an investment linked to the economic performance of the relevant Underlying and prospective investors should note that the return (if any) on their investment in such Financial Instruments will depend upon the performance of such Underlying.

Potential investors should also note that whilst the market value of such Financial Instruments is linked to such Underlying and will be influenced (positively or negatively) by such Underlying, any change may not be comparable and may be disproportionate.

It is impossible to predict how the level of the relevant Underlying will vary over time.

In contrast to a direct investment in the relevant Underlying, such Financial Instruments represent the right to receive payment or delivery, as the case may be, of the relevant amount(s) on the specified or determinable date(s) in respect of such Financial Instruments which may include periodic payments of interest (if specified in the terms and conditions for such Financial Instruments), all or some of which may be determined by reference to the performance of the relevant Underlying.

The applicable terms and conditions will set out the provisions for the determination of the amount(s) payable or deliverable, as the case may be, on the specified or determinable date(s) in respect of the relevant Financial Instruments including any periodic interest payments.

Prospective investors in financial instruments linked to an underlying must review the terms and conditions of the relevant financial instruments to ascertain what the relevant underlying is and to see how both any amounts payable or deliverable, as the case may be, are determined and when any such amount(s) are payable and/or deliverable, as the case may be, before making any decision to purchase such financial instruments.

The only return on Financial Instruments may be the potential payment or delivery, as the case may be, of the amounts payable on exercise or redemption or otherwise due and payment of any periodic interest payments and prospective purchasers should review the terms and conditions of the relevant Financial Instruments to ascertain what amount(s) is/are payable and/or deliverable, what circumstances and when.

Equity securities represent a share in ownership of the issuing company. Equity securities may also give shareholders the right to vote at general meetings of the issuer and receive dividends. The issuer of equity securities has no obligation to repay the original cost of the share to the shareholder until and unless the issuer is wound up. There is a risk that, in the event of the issuer entering into insolvency or other similar proceedings, the shareholders will receive less than their original investment or will receive nothing.

The value of an equity security may go up or down based on the economic performance of the issuer. Equity securities could be exposed to volatility in the market or sector in which the issuer operates as well as the volatility of the general economy.

If the price of an equity security goes down, the issuer may find it difficult to raise further capital which may lead, in turn, to further reductions in the price of that equity security.

The price of an equity security will be affected by the commercial decisions and behaviour of the issuer and its management. In particular, the relevant issuer of the equity securities may or may not elect to pay dividends to shareholders (although in some cases the issuer is required to pay the shareholders a fixed dividend). A failure by the issuer to pay dividends may lead, in turn, to a reduction in the price of the equity security.

Furthermore, if they are not listed or traded on an exchange, or are listed but traded only infrequently, the equity securities may be illiquid, in which case it may be difficult to dispose of the equity securities. An investor with a significant position in equity securities may find it difficult to dispose of large volumes of equity securities even in a liquid market.

Debt securities

Debt securities represent participation in a loan to the issuing company, government or local authority. Although an issuer of debt securities has a contractual obligation to make principal and interest payments to the holders of those securities, the issuer may be unable to meet such obligations. This may reduce the value of the debt securities.

In the event that the issuer of the debt securities enters into insolvency or other similar proceedings, there is a risk that the holders of the debt securities will receive less than their original investment or will receive nothing. Where the issuer of debt securities is a financial institution within the scope of a national or EU resolution regime, there is a risk that debt securities will be subject to bail-in by resolution authorities.

If the collapse of the issuing financial institution poses a threat to financial stability, authorities may

• (i) cancel or amend the obligations of the issuing financial institution to holders of debt securities (either in whole or in part), or
• (ii) convert such debt securities into another type of security, including an equity security.

The price of debt securities may also be affected by interest rates, inflation and other economic factors, market perception of the creditworthiness of the issuer, market liquidity and volatility, amongst other factors.

Exchangeable or convertible debt securities (i.e. those debt securities that can be exchanged or converted into an equity security) include embedded equity derivatives and before exchange or conversion may be subject to risks associated with derivatives as well as the above risks associated with debt securities.

Following conversion or exchange into an equity security, these Financial Instruments may be subject to the typical risks associated with equity securities.

The potential for exchange or conversion may also be affected by certain conditions, such as specified expiry dates.

A collective investment scheme typically enables a number of investors to pool their assets by purchasing units in the scheme. The pooled assets will then be managed and invested by an independent manager (who may invest in other Financial Instruments, among other assets). The price of the units in the collective investment scheme can fall as well as rise.

Investors in a collective investment scheme will be exposed to the risks associated with any investment made by the manager, although exposure to any single type of risk may be reduced by the fact that each investor’s investments will be spread more widely.

The price of units in a collective investment scheme may be affected by the valuation of the scheme and the Financial Instruments and other assets held by the scheme (which may themselves go up or down). Valuations are typically performed by the manager in accordance with the terms and conditions governing the collective investment scheme, and may be based on unaudited accounts or preliminary calculations.

The manager may vary certain quotations for Financial Instruments and other assets held by the collective investment scheme in order to reflect the manager’s judgement as to the fair value (for example where Financial Instruments and assets are illiquid and reliable market prices are difficult to obtain).

Therefore, valuations may be subject to subsequent adjustments upward or downward.

Managers of collective investment schemes may use various strategies when investing pooled assets, including short-selling, securities lending and use of leverage, each of which could alter or magnify the risks investors are exposed to.

There may also be limited opportunities to realize an investment in a collective investment scheme (as a result of the terms and conditions that govern the collective investment scheme) and there may be no secondary market in the collective investment scheme, which means that an investment in the scheme may be highly illiquid and difficult to dispose of.

Please see the section entitled “Financial Instruments linked to fund shares including hedge funds” for further risks relating to units in certain collective investment schemes.

Baskets

The value of baskets of products (such as equity securities, debt securities and indices) may be affected by the number and quality of the products included in the basket. If the products included in the basket are concentrated on a particular issuer, sector or market, the value of the basket may be disproportionately affected by the economic, financial and other factors affecting that issuer, sector or market.

Money market instruments are debt securities representing borrowings of cash for a short term period (generally no longer than six months but occasionally up to one year). Because of their short-term nature, money market instruments are typically more liquid than other investments.

Investments in money market instruments may be affected by the credit risk, market liquidity and volatility, amongst other factors. The speed and volume of money market transactions may also give rise to additional interest and market risks.

A structured deposit is a deposit that is invested for a fixed term and that is fully repayable at maturity. Structured deposits differ from conventional deposits as the return on a structured deposit is calculated according to certain factors (such as an index, a Financial Instrument, a commodity, a foreign exchange rate or a combination of factors). Depending on the structure of the structured deposit, and how the return is calculated, the return may be at risk. This risk will depend on the factors used in the particular structured deposit to calculate the return.

A structured deposit is also subject to counterparty risk in relation to the institution holding the deposit, and may be subject to liquidity risk.

Structured deposits can be complex and non-standardised and the exact nature of their risk will be subject to the particular terms of the documentation governing the structured deposit.

Packaged and combined instruments

A Financial Instrument that is composed of two or more Financial Instruments is potentially exposed to the risk factors associated with all of its constituent Financial Instruments. Although certain packaged instruments contain risk mitigation features (which potentially reduces the risks to which investors are subject), it is possible that investors holding packaged instruments are exposed to more, and more types of, risks than their constituent Financial Instruments.

Financial Instruments may be linked to, inter alia, equity securities, indices, currencies, the credit of specified entities, derivatives, commodities and/or commodity futures, private equity or illiquid assets and real estate, low credit quality securities, distressed securities, investments in emerging or developing markets and/or fund shares including hedge funds.

In respect of Financial Instruments linked to one or more currencies, on the specified or determinable date(s) in respect of such Financial Instruments, investors may receive payment of an amount determined by reference to the value of the relevant currencies on a given date or dates as compared to another date or dates. Interest (if any) payable on such Financial Instruments may be calculated by reference to the value of one or more of the relevant currencies on a given date or dates as compared to another date or dates.

Fluctuations in exchange rates of the relevant currency (or one or more of the currencies in a basket of currencies) will affect the value of Financial Instruments linked to such currency or currencies. Furthermore, investors who intend to convert gains or losses from the receipt of monies from or sale of such Financial Instruments into their home currency may be affected by fluctuations in exchange rates between their home currency and the relevant currency (or one or more of the currencies in a basket of currencies).

Currency values may be affected by complex political and economic factors, including governmental action to fix or support the value of a currency (or one or more of the currencies in a basket of currencies), regardless of other market forces. Purchasers of Financial Instruments linked to a currency or currencies risk losing their entire investment if exchange rates of the relevant currency (or one or more of the currencies in a basket of currencies) do not move in the anticipated direction.

If additional Financial Instruments or options relating to particular currencies or particular currency indices are subsequently issued, the supply of Financial Instruments and options relating to such currencies or currency indices, as applicable, in the market will increase, which could cause the price at which such Financial Instruments are traded in the secondary market to decline significantly.

Financial Instruments may be issued or otherwise entered into, the return on which is linked to derivative instruments (which may be complex) which seek to modify or replicate the investment performance of particular securities, commodities, currencies, interest rates, indices or markets on a leveraged or unleveraged basis.

The Underlying in respect of such Financial Instruments generally has counterparty risk and may not perform in the manner expected, thereby resulting in greater loss or gain in value. Such Financial Instruments are subject to risks that can result in a loss of all or part of the value of the Underlying and thus adversely affect the value of the Financial Instruments. Such risks can include interest rate and credit risk, volatility, world and local market price and demand, and general economic factors and activity.

The Underlying may be a derivative which may also have very high leverage embedded in it that can substantially magnify market movements, meaning that losses could in some cases exceed the value of the relevant derivative instrument and thus result in a total loss.

Some of the markets for derivative instruments are “over-the-counter” or “interdealer” markets, which may be illiquid and are sometimes subject to larger spreads between the bid and offer prices than exchange-traded derivative instruments. The participants in such markets are typically not subject to credit evaluation and regulatory oversight, which would be the case with members of “exchange-based” markets.

This exposes investors in Financial Instruments linked to any such derivatives to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because the counterparty has a credit or liquidity problem or because the counterparty defaults for some other reason. Delays in settlement may also result from disputes over the terms of the relevant derivative contract (whether or not bona fide) since such markets may lack the established rules and procedures for swift settlement of disputes among market participants found in “exchange-based” markets.

These factors may cause the value of a Financial Instrument to decrease.

Such “counterparty risk” is present in all “over-the-counter” or bilateral swaps, and is accentuated in contracts with longer maturities where unforeseen events may intervene to prevent settlement. The valuation of over-the-counter derivative transactions is also subject to greater uncertainty and variation than that of exchange-traded derivatives and valuations provided by one party may differ from valuations provided by a third party or the value upon liquidation of the relevant transaction.

Under certain circumstances, it may not be possible to obtain market quotations for the value of an over-the-counter derivatives transaction.

In respect of Financial Instruments linked to a commodity or basket of commodities or commodity futures, on the specified or determinable date(s) in respect of such Financial Instruments, investors may receive payment of an amount determined by reference to the value of the relevant commodities or futures contracts on a given date or dates as compared to another date or dates.

Interest (if any) payable on such Financial Instruments may be calculated by reference to the value of one or more commodities on a given date or dated as compared to another date or dates or by reference to one or more commodity futures contracts.

Investors should note that the movements in the price of the commodity or basket of commodities may be subject to significant fluctuations that may not correlate with changes in interest rates, currencies or other indices and the timing of changes in the relevant price of the commodity or commodities may affect the actual yield to investors, even if the average level is consistent with their expectations.

In general, the earlier the change in the price or prices of the commodities, the greater the effect on yield.

Commodity futures markets are highly volatile. Commodity markets are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programmes and policies designed to influence commodity prices, world political and economic events, and changes in interest rates. Moreover, investments in futures and options contracts involve additional risks including, without limitation, leverage (margin is usually a percentage of the face value of the contract and exposure can be nearly unlimited).

A holder of a futures position may find such positions become illiquid because certain commodity exchanges limit fluctuations in certain futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits”. Under such daily limits, during a single trading day no trades may be executed at prices beyond the daily limits.

Once the price of a contract for a particular future has increased or decreased by an amount equal to the daily limit, positions in the future can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit.

This could prevent a holder from promptly liquidating unfavourable positions and subject it to substantial losses.

Futures contract prices in various commodities occasionally have exceeded the daily limit for several consecutive days with little or no trading. Similar occurrences could prevent the liquidation of unfavourable positions and subject an investor in a Financial Instrument linked to such contract prices to substantial losses.

The market price of such Financial Instruments may be volatile and may depend on the time remaining to exercise or redemption and the volatility of the price of the commodity or commodities. The price of the commodity or commodities may be affected by economic, financial and political events in one or more jurisdictions, including factors affecting the exchange(s) or quotation system(s) on which any such commodities may be traded.

Financial Instruments may be linked to an Underlying which is subject to legal or other restrictions on transfer or for which no liquid market exists, such as equity securities in private companies. The market prices, if any, of such equity securities tend to be more volatile and it may be impossible to sell such equity securities when desired or to realise their fair value in the event of a sale. Such equity securities may neither be listed on a stock exchange nor traded in an over-the-counter market.

As a result of the absence of a public trading market for these equity securities, they are likely to be less liquid than publicly traded equity securities. There may be substantial delays in attempting to sell non-publicly traded equity securities. Although these equity securities may be sold in privately negotiated transactions, the prices realised from these sales could be less than those originally paid. Furthermore, companies whose equity securities are not registered or publicly traded are not subject to the disclosure and other investor protection requirements which would be applicable if their equity securities were registered or publicly traded.

In addition, an exchange or regulatory authority may suspend trading in a particular contract, order immediate liquidation and settlement of a particular contract, or order that trading in a particular contract be conducted for liquidation only. The illiquidity of positions may result in significant unanticipated losses and thus investors in Financial Instruments linked thereto may also suffer significant unanticipated losses.

Financial Instruments may be linked to particularly risky investments that also may offer the potential for correspondingly high returns. As a result, there is a significant risk that an investor in such Financial Instrument may lose all or substantially all of its investment. The Underlying relating to such Financial Instruments may be rated lower than investment grade and hence may be considered to be “junk bonds” or distressed securities (see also “Financial Instruments linked to distressed securities” below).

Financial Instruments may be linked to the securities of issuers in weak financial condition, experiencing poor operating results, having substantial capital needs or negative net worth, facing special competitive or product obsolescence problems, or that are involved in bankruptcy or reorganization proceedings. Such Financial Instruments may involve substantial risks that can result in substantial or even total losses of the amount invested in such Financial Instruments.

Among the risks inherent in Financial Instruments linked to such investments is that it frequently may be difficult to obtain information as to the true condition of the issuer of the relevant Underlying; the value of the relevant Underlying may be adversely affected by laws relating to, among other things, fraudulent transfers and other voidable transfers or payments, lender liability and a court’s power to disallow, reduce, subordinate or disenfranchise particular claims; the market price of the relevant Underlying may be subject to abrupt and erratic market movements and above-average price volatility, and the spread between the bid and offer prices of the relevant Underlying may be greater than those prevailing in other securities markets; it may take a number of years for the market price of the relevant Underlying to reflect its intrinsic value; in a corporate reorganization, it may not be possible to effect the reorganization (due to, for example, failure to obtain requisite approvals); and in a liquidation (both in and out of bankruptcy) and a reorganization there exists the risk that the liquidation or reorganization will be delayed (for example, until various liabilities, actual or contingent, have been satisfied) or will result in a distribution of cash or a new security the value of which will be less than the purchase price of the relevant Underlying.

Financial Instruments may be linked to securities of issuers that are not located in, or subject to regulation in, developed countries or securities which are not denominated in the currency of, or are not traded in, developed countries. Investment in such Financial Instruments involve certain special risks, including risks associated with political and economic uncertainty, adverse governmental policies, restrictions on foreign investment and currency convertibility, currency exchange rate fluctuations, possible lower levels of disclosure and regulation, and uncertainties as to the status, interpretation and application of laws, including, but not limited to, those relating to expropriation, nationalization and confiscation.

Companies not located in developed countries are also not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to companies in developed countries. Further, securities not traded in developed countries tend to be less liquid and the prices of such securities more volatile. In addition, settlement of trades in some such markets may be much slower and more subject to failure than in markets in developed countries.

Increased custodian costs as well as administrative difficulties (such as the applicability of the laws of the jurisdictions of emerging or developing countries to custodians in such jurisdictions in various circumstances, including bankruptcy, ability to recover lost assets, expropriation, nationalization and record access) may also arise from the maintenance of assets in such emerging or developing countries.

Where the Underlying is or relates to one or more funds the relevant Financial Instruments reflect the performance of such funds, which may be “hedge funds”.

A hedge fund may trade and invest in a broad range of investment interests such as debt and equity securities, commodities and foreign exchange and may enter into derivative transactions, including, without limitation, futures and options. A hedge fund may often be illiquid and may only be traded on a monthly, quarterly or even less frequent basis. For all these reasons and those described below, investing directly or indirectly in hedge funds is generally considered to be risky.

If the Underlying is a hedge fund which does not perform sufficiently, its value will fall, possibly to zero. The hedge fund(s) reflected in the relevant Underlying from time to time and its/their hedge fund trading advisors, as well as the markets and instruments in which they invest, are often not subject to review by governmental authorities, self-regulatory organization’s or other supervisory authorities.

The following is a non-exhaustive list of the risks associated with investing in hedge funds:

(a) Investment Manager

The performance of a hedge fund will depend on the performance of the investments selected by key individuals associated with the day-to-day operations of the investment manager of the relevant hedge fund and upon the expertise of such key individuals. Any withdrawal or other cessation of investment activities on behalf of the investment manager by any of these individuals could result in losses and/or the termination or the dissolution of the relevant hedge fund.

The investment strategy, investment restrictions and investment objectives of a hedge fund give its investment manager considerable discretion to invest the assets thereof and there can be no guarantee that the investment manager’s investment decisions will be profitable or will effectively hedge against the risk of market or other conditions and thus such decisions may cause the value of the relevant hedge fund to decline.

An investment manager may receive performance related fees, which may be substantial. The manner of calculating such fees may create an incentive for the investment manager to make investments that are riskier or more speculative than would be the case if such fees were not paid to the investment manager.

In addition, since the performance fees may be calculated on a basis that includes both unrealised and realised gains on the relevant hedge fund’s assets, such fees may be greater than if they were based solely on realised gains. If a hedge fund does not perform or does not perform sufficiently to cover the fees, the value of the relevant hedge fund will fall and may fall to zero.

(b) Lack of segregation of assets

A prime broker may be, or may have been, appointed in relation to a hedge fund and will accordingly be responsible for custody, clearing, financing and reporting services with respect to the securities transactions entered into by the relevant investment manager. This may result in the hedge fund’s assets being rehypothecated, pooled or placed in an omnibus account. In such cases the hedge fund’s assets may not be segregated from those of the prime broker’s other clients, the prime broker itself or third party sub-custodians.

Please see the section entitled “Considerations Relating to Use of Prime Brokerage Arrangements” for further information on the risks that hedge funds may face when using prime brokerage arrangements.

(c) Hedging risks

An investment manager may utilise warrants, futures, forward contracts, swaps, options and other derivative instruments involving securities, currencies, interest rates, commodities and other asset categories (and combinations of the foregoing) for the purposes of establishing “market neutral” arbitrage positions as part of its trading strategies and to hedge against movements in the capital markets.

Hedging against a decline in the value of a portfolio position does not eliminate fluctuations in the values of portfolio positions or prevent losses if the values of such positions decline, but establishes other positions designed to gain from those same developments, thus moderating the decline in the portfolio positions’ value.

Such hedging transactions may also limit the opportunity for gain if the value of the portfolio position should increase. Moreover, it may not always be possible for the investment manager to execute hedging transactions, or to do so at prices, rates or levels advantageous to the hedge fund. The success of any hedging transactions will be subject to the movements in the direction of securities prices and currency and interest rates, and stability or predictability of pricing relationships.

Therefore, while a hedge fund might enter into such transactions to reduce currency exchange rate and interest rate risks, unanticipated changes in currency or interest rates may result in poorer overall performance for the hedge fund than if it had not engaged in any such hedging transactions.

In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio position being hedged may vary. Moreover, for a variety of reasons, the investment manager may not be able to, or may not seek to, establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. An imperfect correlation may prevent a hedge fund from achieving the intended hedge or expose a hedge fund to risk of loss.

(d) Leverage

Hedge funds may be able to borrow (or employ leverage) without limitation and may utilize various lines of credit and other forms of leverage, including swaps and repurchase agreements. While leverage presents opportunities for increasing a hedge fund’s total return, it has the effect of potentially increasing losses as well. If income and appreciation on investments made with borrowed funds are less than the required interest payments on the borrowings, the value of the hedge fund will decrease.

Additionally, any event which adversely affects the value of an investment by a hedge fund would be magnified to the extent such hedge fund is leveraged. The cumulative effect of the use of leverage by a hedge fund in a market that moves adversely to such hedge fund’s investments could result in a substantial loss to the hedge fund that would be greater than if the hedge fund were not leveraged.

Furthermore, any use by the hedge fund of swaps and other derivatives to gain exposure to certain investments may leverage the hedge fund’s assets, and subject it to the risks described above.

(e) Risks associated with the use of margin borrowings

An investment manager’s anticipated use of short-term margin borrowings will result in certain additional risks to the relevant hedge fund. For example, if securities pledged to brokers to secure a hedge fund’s margin accounts decline in value, such hedge fund could be subject to a “margin call”, pursuant to which it must either deposit additional funds with the broker or be the subject of mandatory liquidation of the pledged securities to compensate for the decline in value.

In the event of a sudden drop in the value of the hedge fund’s assets, the investment manager might not be able to liquidate assets quickly enough to pay off the margin debt.

In such a case, the relevant prime broker may liquidate additional assets of the hedge fund, in its sole discretion, in order to satisfy such margin debt. The premiums for certain options traded on non-US exchanges may be paid for on margin. If the investment manager sells an option on a futures contract, it may be required to deposit margin in an amount equal to the margin requirement established for the futures contract underlying the option and, in addition, an amount substantially equal to the premium for the option.

The margin requirements imposed on the writing of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Whether any margin deposit will be required for over-the-counter options will depend on the agreement of the parties to the transaction.

(f) Low credit quality and distressed securities

Hedge funds may invest in securities linked to particularly risky investments or to securities of issuers in weak financial condition, experiencing poor operating results, having substantial capital needs or negative net worth, facing special competitive or product obsolescence problems, or that are involved in bankruptcy or reorganization proceedings.

Investments of this type may involve substantial risks that can result in substantial or, at times, even total losses. Some of the risks inherent in investments in such entities are described in “Financial Instruments linked to low credit quality securities” and “Financial Instruments linked to distressed securities” .

(g) Derivatives

Hedge funds may invest in derivative instruments (some of which may be complex) which seek to modify or replicate the investment performance of particular securities, commodities, currencies, interest rates, indices or markets on a leveraged or unleveraged basis. These instruments generally have counterparty risk and are subject to the risks described in “Financial Instruments linked to Derivatives” above.

Hedge funds may also buy or sell options on a variety of underlying assets.

The risk of writing (selling) options is unlimited in that the writer of the option must purchase (in the case of a put) or sell (in the case of a call) the underlying security at a certain price upon exercise. There is no limit on the price a hedge fund may have to pay to meet its obligations as an option writer. As assets that can have no value at settlement, options can introduce a significant additional element of leverage and risk to a hedge fund’s market exposure.

The use of certain options strategies can subject a hedge fund to investment losses that are significant even in the context of positions for which the relevant investment manager has correctly anticipated the direction of market prices or price relationships.

(h) Special risks associated with trading in over-the-counter derivatives

Some of the markets in which a hedge fund may effect derivative transactions are “over-the-counter” or “interdealer” markets, which may be illiquid and are sometimes subject to larger spreads between the bid and offer prices than exchange-traded derivative transactions. The participants in such markets are typically not subject to credit evaluation and regulatory oversight, which would be the case with members of “exchange-based” markets. This exposes the hedge fund to the risk of counterparty default or a delay in settlement and thus the risks described in “Financial Instruments linked to Derivatives” above.

These factors may cause a hedge fund to suffer a loss due to adverse market movements while replacement transactions are executed or otherwise. Such “counterparty risk” is accentuated where the hedge fund has concentrated its transactions with a single or small group of counterparties. A hedge fund generally is not restricted from dealing with any particular counterparty or from concentrating any or all of its transactions with one counterparty.

In addition, if an investment manager engages in such over-the-counter transactions, the relevant hedge fund will be exposed to the risk that the counterparty (usually the relevant prime broker) will fail to perform its obligations under the transaction. The valuation of over-the-counter derivative transactions is also subject to greater uncertainty and variation than that of exchange-traded derivatives.

The “replacement” value of a derivative transaction may differ from the “liquidation” value of such transaction, and the valuation provided by a hedge fund’s counterparty to such transactions may differ from the valuation provided by a third party or the value upon liquidation of the transaction.

Under certain circumstances it may not be possible for a hedge fund to obtain market quotations for the value of an over-the-counter derivatives transaction.

A hedge fund may also be unable to close out or enter into an offsetting over-the-counter derivative transaction at a time it desires to do so, resulting in significant losses. In particular, the closing-out of an over-the-counter derivative transaction may usually only be effected with the consent of the counterparty to the transaction. If such consent is not obtained, a hedge fund will not be able to close out its obligations and may suffer losses.

(i) Illiquid investments

Hedge funds may make investments which are subject to legal or other restrictions on transfer or for which no liquid market exists, such as equity securities in private companies and are subject to the risks described in “Finance Instruments linked to private equity or illiquid assets and real estate” above.

In addition, futures positions taken by a hedge fund may become illiquid because, for example, certain commodity exchanges limit fluctuations in certain futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits” as described in “Financial Instruments linked to Commodities and/or Commodity Futures” above.

(j) Legal and regulatory risks

Legal and regulatory changes could adversely affect a hedge fund. Regulation of investment vehicles, such as hedge funds and of many of the investments an investment manager is permitted to make on behalf of a hedge fund, is still evolving and therefore subject to change. In addition, many governmental agencies, self-regulatory organisations and exchanges are authorised to take extraordinary actions in the event of market emergencies. The effect of any future legal or regulatory change on a hedge fund is impossible to predict, but could be substantial and adverse.

(k) Short-selling

A hedge fund may use a short-selling strategy and therefore be subject to, inter alia, the risks described in the section entitled “Considerations Relating to Short-Selling”.

(l) Securities Financing Transactions

A hedge fund may authorise its prime broker to enter into securities financing transactions in relation to the securities which the prime broker holds on behalf of the hedge fund. The hedge fund may therefore be subject to, inter alia, the risks described in the section entitled “Considerations Relating to Securities Financing Transactions”.

(m) Commodities and Commodity futures

A hedge fund may invest in commodities and/or commodity futures and therefore be subject to, inter alia, the risks described in “Financial Instruments linked to Commodities and/or Commodity Futures”.

(n) Hedge fund compensation

A hedge fund typically provides for a performance fee or allocation, over and above a basic advisory fee, to its general partner, investment manager or person serving in an equivalent capacity. Performance fees or allocations could create an incentive for an investment manager to choose riskier or more speculative underlying investments than would otherwise be the case.

(o) “Soft Dollar” payments

In selecting brokers, banks and dealers to effect transactions on behalf a hedge fund, an investment manager may consider such factors as price, the ability of the brokers, banks and/or dealers to effect transactions promptly and reliably, their facilities, the operational efficiency with which transactions are effected, their financial strength, integrity and stability and the competitiveness of commission rates in comparison with other brokers, banks and dealers, as well as the quality, comprehensiveness and frequency of any products or services provided, or expenses paid, by such brokers, banks and dealers.

Products and services may include research items used by the investment manager in making investment decisions, and expenses so paid may include general overhead expenses of the investment manager. Such “soft dollar” benefits may cause an investment manager to execute a transaction with a specific broker, bank, or dealer even though it may not offer the lowest transaction fees. An investment manager is not required to

• (i) obtain the lowest brokerage commission rates or
• (ii) combine or arrange orders to obtain the lowest brokerage commission rates on its brokerage business.

If an investment manager determines that the amount of commissions charged by a broker is reasonable in relation to the value of the brokerage and research products or services provided by such broker, it may execute transactions for which such broker’s commissions are greater than the commissions another broker might charge.

Such brokerage commissions may be paid to brokers who execute transactions for the relevant managed account and which supply, pay for or rebate a portion of the hedge fund’s brokerage commissions to the hedge fund for payment of the cost of property or services (such as research services, telephone lines, news and quotation equipment, computer facilities and publications) utilized by the relevant investment manager or its affiliates.

An investment manager will have the option to use “soft dollars” generated by its investment activities to pay for the property and services described above. The term “soft dollars” refers to the receipt by an investment manager of property and services provided by brokers (or futures commission merchants in connection with futures transactions) without any cash payment by such investment manager based on the volume of revenues generated from brokerage commissions for transactions executed for clients of the investment manager.

An investment manager will consider the amount and nature of research services provided by brokers, as well as the extent to which such services are relied upon, and will attempt to allocate a portion of the brokerage business of the relevant managed account on the basis of those considerations.

(p) Special risks associated with trading in forward contracts

Hedge funds may engage in forward trading. Forward contracts, unlike futures contracts, are not traded on exchanges and are not standardised, rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and “cash” trading is substantially unregulated; there is no limitation on daily price movements and speculative position limits are not applicable.

The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can experience periods of illiquidity, sometimes of significant duration. There have been periods during which certain participants in these markets have been unable to quote prices for certain currencies or commodities or have quoted prices with an unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell.

Disruptions can occur in any market traded by the hedge funds due to unusually high trading volume, political intervention or other factors. Market illiquidity or disruption could result in major losses to a hedge fund.

(q) Concentration of investments

Although in general a hedge fund will aim to invest in diversified investments, the investment manager in respect of a hedge fund may invest such hedge fund’s assets in a limited number of investments that may be concentrated in a few countries, industries, sectors of an economy and/or issuers.

As a result, although investments by hedge funds should be diversified, the negative impact on the value of the relevant hedge fund from adverse movements in a particular country, economy or industry or in the value of the securities of a particular issuer could be considerably greater than if such hedge fund were not permitted to concentrate its investments to such an extent.

(r) Turnover

Hedge funds may invest on the basis of certain short-term market considerations. As a result, the turnover rate within hedge funds is expected to be significant, potentially involving substantial brokerage commissions, fees and other transaction costs.

(s) Operational and human error

The success of a hedge fund depends in part upon the relevant investment manager’s accurate calculation of price relationships, the communication of precise trading instructions and ongoing position evaluations. In addition, an investment manager’s strategies may require active and ongoing management of durations and other variables, and dynamic adjustments to a hedge fund’s positions.

There is the possibility that, through human error, oversight or operational weaknesses, mistakes could occur in this process and lead to significant trading losses and an adverse effect on the net asset value of the relevant hedge fund.

(t) Reliability of valuations

Hedge funds are valued pursuant to the hedge fund’s instrument governing such valuations. The governing instruments of hedge funds generally provide that any securities or investments which are illiquid, not traded on an exchange or in an established market or for which no value can be readily determined, will be assigned such fair value as the investment manager may determine in its judgement based on various factors.

Such factors include, but are not limited to, aggregate dealer quotes or independent appraisals. Such valuations may not be indicative of what the actual fair market value would be in an active, liquid or established market.

(u) Investment strategies

Hedge funds are a relatively heterogeneous asset class in which the investment managers may determine their strategies in their sole discretion. As a consequence there is no commonly accepted definition for the strategies employed by hedge funds. It can even be impossible to associate certain hedge funds with only one specific definition of a strategy.

Furthermore there are various levels on which classifications can be made: any general strategy consists of various sub-strategies which may be very different from each other.
Financial Instruments may be linked to or be futures or options or issued as “over the counter” or bilateral contracts for which there is no trading market.

Transactions in futures involve the obligation to make, or to take, delivery of the underlying asset of the contract at a future date, or in some cases to settle the position with cash. They carry a high degree of risk. The ‘gearing’ or ‘leverage’ often obtainable in futures trading means that a small movement can lead to a proportionately much larger movement in the value of the investment, and this can work against an investor as well as for it.

Futures transactions have a contingent liability, and investors should be aware of the implications of this, in particular any margining requirements.

Margined transactions require the purchaser to make a series of payments against the purchase price, instead of paying the whole purchase price immediately. If an investor trades in contracts for differences or sell options, it may sustain a total loss of the margin it deposits to establish or maintain a position. If the market moves against an investor, it may be called upon to pay substantial additional margin at short notice to maintain the position.

If it fails to do so within the time required, its position may be liquidated at a loss and it will be responsible for the resulting deficit. Even if a transaction is not margined, it may still carry an obligation to make further payments in certain circumstances over and above any amount paid when it entered the contract.

Financial Instruments may be lined to options with different characteristics subject to the following conditions.

• Buying options:
  Buying options involves less risk than selling options because, if the price of the Underlying asset moves against the investor, it can simply allow the option to lapse. The maximum loss is limited to the premium, plus any commission or other transaction charges.
• Writing options:
  If an investor writes an option, the risk involved is considerably greater than buying options. It may be liable for margin to maintain its position and a loss may be sustained well in excess of the premium received. By writing an option, the investor accepts a legal obligation to purchase or sell the Underlying if the option is exercised against it, however far the market price has moved away from the exercise price.

If the investor already owns the Underlying which it has contracted to sell (when the option will be known as a ‘covered call option’) the risk is reduced. If it does not own the Underlying (an ‘uncovered call option’) the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, and then only after securing all details of the applicable conditions and potential risk exposure.

Futures and options contracts can also be referred to as contracts for differences. These can be options and futures on any index, as well as currency and interest rate swaps. However, unlike other futures and options, these contracts can only be settled in cash. Investment in a contract for differences carries the same risks as investing in a future or an option and you should be aware of these as set out above.

Financial Instruments linked to or which are Off-exchange transactions in derivatives

While some off-exchange markets are highly liquid, transactions in off-exchange or “non-transferable” derivatives may involve greater risk than investing in on-exchange derivatives because there is no exchange market on which to close out an open position. It may be impossible to liquidate an existing position, to assess the value of the position arising from an off-exchange transaction or to assess the exposure to risk.

Bid prices and offer prices need not be quoted, and, even where they are, they will be established by dealers in these instruments and consequently it may be difficult to establish what is a fair price.

B. Issuer Risk Factors

1. Zenith Capital Investments as issuer or counterparty

Where Zenith Capital Investments is the issuer or counterparty of the relevant Financial Instruments, an investment in any such Financial Instruments bears the risk that Zenith Capital Investments is not able to fulfil its obligations under the relevant Financial Instruments on any relevant due date.

In order to assess the risk, prospective investors should consider all information provided in the offering documents relating to the relevant Financial Instruments and consult with their own professional advisers if they consider it necessary.

The risk related to Zenith Capital Investments’s ability to fulfil its obligations in respect of any such Financial Instruments is described by reference to the credit ratings assigned by independent rating agencies. A rating is not a recommendation to buy, sell or hold Financial Instruments and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. A suspension, reduction or withdrawal of any rating assigned may adversely affect the market price of some Financial Instruments where Zenith Capital Investments is the issuer.