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18.39. Fixed Income Securities Risks

Fixed income securities in which the Investment Compartments may invest are generally subject to the following risks:

1.  The market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors. Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Investment Compartment may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates. The magnitude of these fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Investment Compartment’s investments will not affect interest income derived from instruments already owned by the Investment Compartment, but will be reflected in the Investment Compartment’s NAV. The Investment Compartment may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by Investment Compartment management. To the extent the Investment Compartment invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related securities), the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Investment Compartment) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the NAV of the Investment Compartment to the extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to. A security backed by the “full faith and credit” of the is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates change.

2.  During periods in which the Investment Compartment may use leverage, such use of leverage will tend to increase the Investment Compartment’s interest rate risk. The Investment Compartment may utilize certain strategies, including taking positions in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of fixed income securities held by the Investment Compartment and decreasing the Investment Compartment’s exposure to interest rate risk. The Investment Compartment is not required to hedge its exposure to interest rate risk and may choose not to do so. In addition, there is no assurance that any attempts by the Investment Compartment to reduce interest rate risk will be successful or that any hedges that the Investment Compartment may establish will perfectly correlate with movements in interest rates.

3.  The Investment Compartment may invest in variable and floating rate debt instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Investment Compartment also may invest in inverse floating rate debt securities, which may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality. To the extent the Investment Compartment holds variable or floating rate instruments, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities, which may adversely affect the NAV of the Investment Compartment’s common shares.

4.  The value of fixed income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuer’s goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer.

5.  Credit risk is the risk that one or more fixed income securities in the Investment Compartment’s portfolio will decline in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Investment Compartment invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests in investment grade securities. See “—Below Investment Grade Securities Risk.” In addition, to the extent the Investment Compartment uses credit derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The degree of credit risk depends on the issuer’s financial condition and on the terms of the securities.