Risk Considerations International Life Settlements Fund
Introduction
ILSF is an investment fund that invests in Life Settlements, in life insurance policies. This type of investments has specific risk characteristics. Various are listed and adressed in this overview.General
Despite the possibility for ILSF to use options, futures and swap contracts and to enter into forward foreign exchange transactions with the aim to hedge exchange rate risks, ILSF is subject to market or currency fluctuations, and to the risks inherent in all investments. Therefore, no assurance can be given that the invested capital will be preserved, or that capital appreciation will occur.Exchange Rates
The currency in which the Classes of Units of ILSF is denominated is not necessarily the Reference Currency of ILSF or the investment currency of ILSF concerned. Investments are made in those currencies that best benefit the performance of ILSF in the view of the Board of Directors as advised by the Investment Committee of ILSF. Changes in foreign currency exchange rates may affect the value of Units held in ILSF. Unitholders investing in a share class other than in the currency in which the relevant Class of Units is denominated should be aware that exchange rate fluctuations could cause the value of their investment to diminish or increase.Longevity
Returns on Traded Insurance Policies are dependent on the life expectancies (LE) of the insured persons and these may be difficult to predict. If an insured person outlives his indicated life expectancy, returns may fall considerably because there are more premiums to pay and a postponement on the receipt of death benefits.Services Providers
The achievement of ILSF’s objective requires the use of a broad range of service providers, including without limitation, medical underwriters, policy providers, escrow agents, verification and tracking agents, actuarial auditors. Given the special features and the lack of sophistication of the Traded Insurance Policies market, there can be no assurance for the Unitholders that any of the providers will be in existence at all times and that will perform their activities efficiently. A deficient service (e.g. an inappropriate Traded Insurance Policies’s due diligence by a Policy Provider and/or a poor verification by the tracking agent) may have an effect on the value of the Traded Insurance Policies and therefore an effect on the overall value of ILSF.Purchase of Traded Insurance Policies
The Board of Directors as advised by the Investment Committee of ILSF, and in accordance with ILSF’s objective, strategies and restrictions, selects the Traded Insurance Policies that better suits with its strategy. In many cases the lack of available Traded Insurance Policies complying with the Management Company’s specifications shall affect the performance of the Sub-Funds.Liquidity
Potential investors should note that investments in Traded Insurance Policies are not liquid investments. In some cases, a decision to unwind a portfolio of Traded Insurance Policies may not be the most efficient option to meet the Fund’s liquidity needs. In addition, investments in Traded Insurance Policies are considered to be “long term investments”, consequently investors should notice that in certain cases, several years may be required before a realization of value is achieved. Realization of value in the short-term may be difficult or may have to be made at a substantial discount compared to its expected long-term return. In some situations The Board of Directors as advised by the Investment Committee of ILSF may decide to leave Assets in a liquid form, therefore investor should be aware that this may substantially decrease the performance of the Fund.Valuation
The value of ILSF that invests in Traded Insurance Policies will be affected by the values of the Traded Insurance Policies. At any times, the value of the Traded Insurance Policies may change as a consequence of a modification of some of the parameters established in the actuarial model and reviewed by the actuarial auditor. Such modifications will result in a change in the Net Asset Value.Regulatory Framework
The regulatory supervision and legal infrastructure in the traded insurance policy market may not provide the same degree of protection or information to investors as would generally apply in other highly sophisticated markets. Any change in the regulatory framework may lead to a decline of the Fund’s return.Management Company
Investors should note that ILSF’s performance may suffer a negative impact should one of the key persons acting on behalf of the Management Company, managers, officers and/or advisors, die, are declared incompetent or otherwise ceases to act on behalf of the Management Company.Actuarial Model
The values of the Traded Insurance Policies are established through the actuarial model is reviewed by an independent actuarial firm as well as by the Auditor of ILSF. This model is subject to data provided by different sources. There is no assurance that such information is accurate or sufficient.Taxation
Despite the possibility that ILSF may use special purpose vehicles to place investments in order to mitigate certain tax risks, there can be no assurance that an amendment, inaction, abolition or interpretation of one or more laws may not directly impact the investments of ILSF. ILSF will elect to be treated as partnerships for U.S. federal income tax purposes. ILSF will not be entitled to treaty benefits under the U.S.-Luxembourg income tax treaty. Unless a Unitholder is entitled to treaty benefits under a treaty between his, her or its country of residence and the United States, life insurance proceeds paid upon the death of a U.S. insured allocable to such Unitholder may be subject to U.S. withholding tax at a 30% rate. To the extent U.S. withholding taxes are imposed on a Unitholder’s allocable share of policy proceeds or other income, such Unitholder’s account will be credited with its share of policy proceeds or other income reduced by such withholding tax. Requirements for U.S. treaty entitlement are discussed in general terms below. However, a Unitholder should satisfy him, her, or itself as to the overall U.S. and non-U.S. tax consequences in their own particular circumstances of their acquisition, ownership and disposal of the Units, by consulting their own tax advisers.Insurance Company – Credit
Investors should note that the Traded Insurance Policies are issued by Insurances Companies. Consequently ILSF is exposed to the risk of the life insurance company becoming insolvent. ILSF will invest in policies issued by carriers with a minimum rating of A- at the time of the investment.Borrowing/Leverage
The Management Company may borrow Assets for any purpose including coverage of operating expenses, payment of redemptions and transactions. Investors should be aware that such leverage can substantially increase the performance of the Sub-Fund but also result in greater loss.Effect of Substantial Redemptions
Substantial redemption of the Units could cause the liquidation of ILSF. Moreover, this substantial redemption could suppose a significant sale of position which would bring adverse effects on the Management Company’s strategy, the performance of ILSF and increase the expenses of ILSF.Legal Risk
Potential investors should note that investments in Traded Insurance Policies carry risks additional to those inherent in other investments. In particular, potential investors should note that, given the particularities of the market, investment in any Traded Insurance Policy may afford a lower level of legal protection to investors which may in turn have a negative impact on ILSF. ILSF may need to enforce its contracts against Insurance Companies located in foreign jurisdictions. Also it must face the risk of having to contend with the legal system of that jurisdiction, a lack of investors protection, inadequate legislation for market participants, change of laws, etc.Medical Cures and Mortality Uncertainty
The acquisition of Traded Insurance Policies is associated to the life expectancy of the insured; consequently any medical discovery may increase the life expectancy of an insured and decrease the performance of ILSF. The mortality uncertainty relates to current insufficient historical data of life expectancy predictions as against actual deaths in Traded Insurances Policies. As a result of this, mortality tables used to value the policies may not be accurate.Options, Futures and Swaps
ILSF may use options, futures and swap contracts and enter into forward foreign exchange transactions to the extent allowed in the Appendices of the prospectus hereof and in accordance with the investment policy of ILSF. The ability to use these strategies may be limited by market conditions and regulatory limits and there can be no assurance that the objective sought to be attained from the use of these strategies will be achieved. Participation in the options or futures markets, in swap contracts and in foreign exchange transactions involves investment risks and transaction costs to which ILSF would not be subject if they did not use these strategies. If the Management Company’s predictions of movements in the direction of the securities, foreign currency and interest rate markets are inaccurate, the adverse consequences to ILSF may leave ILSF in a less favourable position than if such strategies were not used. Risks inherent in the use of options, foreign currency, swaps and futures contracts and options on futures contracts include, but are not limited to (a) dependence on the Management Company’s ability to predict correctly movements in the direction of interest rates, securities prices and currency markets; (b) imperfect correlation between the price of options and futures contracts and options thereon and movements in the prices of the securities or currencies being hedged; (c) the fact that skills needed to use these strategies are different from those needed to select portfolio of Traded Insurance Policies; (d) the possible absence of a liquid secondary market for any particular instrument at any time; and (e) the possible inability of ILSF to purchase or sell a portfolio at a time that otherwise would be favorable for it to do so, or the possible need for ILSF to sell a portfolio at a disadvantageous time. Where ILSF enters into swap, option and forward transactions on an OTC basis it is exposed to a potential counterparty risk. In case of insolvency or default of the said counterparty, such event would affect the Assets of ILSF.Risk of Insurable Interest
It is important that the original policyholder (or family or other persons with a substantial interest in the continuity of the insured) has an insurable interest in the policy at the time of issuance of the policy. An insurance company has always the right to re-investigate this during the existence of the policy. An insurance company can also deny claims based on fraud.
