# Frequently asked questions

## How do I invest in the Adrigo hedge fund?

Adrigo Small & Midcap L/S is available in Luxembourg, Norway, Finland and Sweden.

Do you want to know more about how to invest in Adrigo Small & Midcap L/S? Please contact us on info@adrigo.se and we will get back to you.

## What is a hedge fund?

A hedge fund is a special type of fund that is characterized by freer investment rules and investment opportunities than traditional equity funds.

While an equity fund only invests in a single type of security, stocks, a hedge fund can invest in a wide range of assets. Hedge funds can invest the fund's capital in everything from uncomplicated securities such as stocks, bonds and mutual funds to more complex financial instruments such as derivatives. The hedge fund can also short and hedge positions if it appears to be beneficial.

What sets hedge funds apart from other types of funds is that they aim to generate a profit regardless of the outlook on the stock market. A hedge fund has the ability to generate positive returns regardless of whether the market is going up or down.

## What do we mean by absolute returns?

The objective of the Adrigo Small & Midcap L/S is to create an absolute return at a lower risk than that which prevails in the equity market at large. That the fund aims for absolute returns means that the goal is to generate a profit regardless of the market situation and economy, i.e. regardless of whether the market goes up or down. To count as an absolute return, the fund's return must be higher than its benchmark index. Adrigo's comparison rate is STIBOR 1M, a reference rate that is often applied to bonds, loans and financial derivatives.

## What is meant by standard deviation?

Standard deviation is a statistic measure that describes how a certain amount of data deviates from a mean value. If the outlier is close to the mean, the standard deviation is low, if it is far from the mean, the standard deviation is high. In the fund industry, standard deviation is used as a measure of how much the fund's value varies and thus how risky it is to invest in it.

If a fund has a low standard deviation, the risk for the investor is low. Conversely, a high standard deviation indicates that the fund is a riskier investment. A high standard deviation does not only mean that the fund has a high level of risk, it can also indicate the diversification of the fund's portfolio.

When it comes to equity funds, it is commonly noted that a standard deviation of less than 10 percent indicates low risk, while anything above 20 percent can be considered high risk. For hedge funds, many analysts set the limit significantly lower, where a standard deviation of 5–8 percent is considered relatively risky.

## What is the Sharpe ratio?

The Sharpe ratio was developed by the American economist William Sharpe and is a measure of how much profit an asset delivers in relation to the investment risk. A high Sharpe ratio shows a good return in relation to exposed risk to you as an investor.

The Sharpe ratio is calculated by dividing the asset's return less the risk-free rate, by the level of risk. The risk-free interest rate is usually defined as the current interest rate for government bills with a 3-month maturity. When we talk about mutual funds, the risk is the same as the standard deviation, i.e. how much the fund's value fluctuates over time. In order to make a fair assessment of a specific hedge fund using the Sharpe ratio, one should compare funds that have a similar focus, industry composition and investment strategy. Otherwise, the measurement risks being misleading.

This is how the Sharpe ratio is calculated:

Sharpe ratio = Return minus risk-free rate / Risk (standard deviation)

## What is the High-water Mark Principle?

The term "high-water mark" refers to a performance-based fee principle that regulates the manager's compensation should a fund decrease in value. A fund manager applying the High-water Mark Principle does not charge any performance-based compensation until the fund has returned to its previous highest level, if it declines in value.

For example, if a hedge fund goes up in value from 60 to 90 and then down to 75, the manager will not take out any compensation until the fund is up to 90 again. The idea is to stimulate the fund's managers to generate as much positive return as possible, even in the short term, and to avoid excessively risky strategies. At Adrigo, we apply the High-water Mark Principle for Adrigo Small & Midcap L/S.

## What is short selling?

Short selling, or selling and equity short, means that one sees an asset will go down in value and tries to make money on the downside.

In concrete terms, it is possible, for example, to sell a position in a company without owning it. One temporarily "borrows" the asset and immediately sells it to someone else. If the asset does indeed go down in price, it is then possible to buy it back for a lower price and thus make a profit on the price difference. The risk of shorting is that if the asset increases in value instead of decreasing, then the shorter will make a loss.

## What happens if the fund company ends up insolvent?

If the fund company goes bankrupt, shareholders in Adrigo Small & Midcap L/S do not lose their capital. Adrigo's assets are completely separate from the fund company itself and therefore cannot be claimed in the event of bankruptcy. Assets that are invested in the fund and in custody accounts are with the fund company's custodian, SEB (Scandinavian Enskilda Banken AB), and they would take over both assets and management in the event of bankruptcy.

## Do hedge funds take greater risks than equity funds?

That can be the case, but the risk varies namely from fund to fund. Some hedge funds are more leveraged and aim for a higher return in the short term. Such hedge funds may involve a greater risk compared to the average equity fund. Other hedge funds are more conservative in their approach and involve less risk exposure than the average equity fund.

One way to assess the level of risk for a specific fund is to look at the long-term standard deviation. Since its inception, Adrigo Small & Midcap L/S has had a significantly lower standard deviation and risk than traditional equity funds on the Nordic market.

## What type of fund is Adrigo Small & Midcap L/S?

Adrigo Small & Midcap L/S is, like most hedge funds, a special fund and operates in accordance with the Chapter 12, Act (2013:561) which pertains to managers of alternative investment funds.

Special funds are not covered by the same EU directive that regulates so called UCITS funds. Among other things, the directive includes a set of rules that limit how the funds can and must be invested.

In practice, the biggest difference between special funds and UCITS funds is that for the latter the funds can be traded (bought/sold) more frequently by unit owners. For special funds, the managers have more freedom to invest capital in different types of assets.

- How do I invest in the Adrigo hedge fund?
- What is a hedge fund?
- What do we mean by absolute returns?
- What is meant by standard deviation?
- What is the Sharpe ratio?
- What is the High-water Mark Principle?
- What is short selling?
- What happens if the fund company ends up insolvent?
- Do hedge funds take greater risks than equity funds?
- What type of fund is Adrigo Small & Midcap L/S?