Hermitage Fund - Disclaimer

Disclaimer

Please note that a more comprehensive risk warning section is contained in the relevant prospectuses of the two Hermitage "Funds".

Potential investors should note that there are significant risks inherent in investing in Russian securities, not typically associated with investing in securities of companies in more developed countries, including those risks described below. Similar risks may also prevail in other countries comprising the Region. Investment in the Funds is only suitable for sophisticated investors who understand and are able to bear the risks involved.

The Region
The Region that the Fund will invest in comprimises Russia and all other countries of the former Soviet Union and those countries generally considered to comprise Central and Eastern Europe which include, but are not limited to Hungary, Poland, the Czech Republic, Slovakia, Romania, Bulagaria, Albania, and the countries of the former Yugoslavia.

Political Risk
Russia has over recent years undergone profound political and social change. The net asset value of the Funds may be affected by uncertainties such as political or diplomatic developments, social and religious instability, changes in government policies, taxation and interest rates, currency repatriation restrictions and other political and economic developments in the law or regulations in Russia and, in particular, the risks of expropriation, nationalisation (it is not known with any certainty whether the privatisation and marketisation processes will continue at the same pace or whether they will be curtailed or abandoned altogether) and confiscation of assets and changes in legislation relating to the level of foreign ownership. Civil unrest and wars, ethnic tensions, terrorism and political conflict are likely to continue for a significant period.

Economic Risk
The economy in Russia is generally weak, volatile and reliant on substantial international assistance. Russia lacks a well developed infrastructure and whilst telecommunications and financial systems are developing they are often of a low standard. Instability has resulted in a short-term approach for instance in relation to bank lending. There are limited means for channelling existing domestic savings through institutions and businesses can experience difficulty in obtaining working capital. It may be necessary to adopt economic policies to facilitate debt service requirements which may lead to a period of lower economic growth. Growing crime levels, including in relation to extortion and fraud, have now caught the attention of governmental agencies outside of Russia.

Lack of Market Economy
Russian businesses generally have little recent history or experience of operating within a modern market-orientated economy. Many of the companies serving the formerly captive markets have proved to be non-viable in a more market-oriented economy. Relative to companies operating in Western economies, Russian companies are generally characterised by a lack of (i) management with experience of operating in a market economy, (ii) modern technology and (iii) a sufficient capital base with which to develop and expand their operations. There are also severe constraints which hinder the economic move to a market-oriented economy. These include the general practice of inter-company credit which may jeopardise the economy and labour legislation which is evolving from guaranteed employment to a lack of job protection. It is unclear what will be the effects on these companies, if any, of Russia’s attempts to move toward a more market-oriented economy and what impact such effects may have on the Net Asset Value and operation of the Funds.

The Market for Russian Securities
The securities of Russian companies are mostly traded over-the-counter and, despite the large number of stock exchanges, there is still no organised public market for such securities. This factor, combined with the fact that a substantial proportion of securities transactions in Russia are still privately negotiated outside of stock exchanges, means that it may be difficult to value the Funds' investments and until such time as the market develops further the Funds' investments will generally be illiquid. There can be no assurance that an effective market system will develop to provide means for the Funds' investments to be more liquid. The number of potential investments available to the Fund may also be limited by the fact that local securities are not listed in the manner that would be expected in other markets. In addition, the extent of restructuring, inter-enterprise debt and lack of financing alternatives results in an increased risk of possible business failures. Whilst investment by the Funds is intended to be diversified, such an event could have a material effect on the Net Asset Value of the Fund. The range of potential investment opportunities may also be restricted - a limited number of issuers represent a disproportionately large percentage of market capitalisation and trading value.

Official Data and Availability of Information
The quality and reliability of official data published by the Russian government and government agencies and the information available, including both general economic data and information concerning the operations, financial results, capitalisation and financial obligations, earnings and securities of specific enterprises, is generally not of the same standard as that of more developed Western countries.

Settlement Risk for Russian Securities
The absence of an organised securities market as well as the underdeveloped state of the banking and telecommunications systems leads to concerns relating to settlement, clearing and registration of transactions in securities. There is no central registration system: registrar services are carried out by the companies themselves or by registrars located throughout Russia. A company with more than five hundred shareholders owning ordinary shares is required to have an independent registrar; however, the independence of such a registrar may sometimes be disputed as the company’s management can often exert considerable influence over the share register by illegally instructing the registrar to refuse to record transactions on the share register. Independent registrars are subject to only limited state supervision which is in the process of development. It is possible for the Funds to lose their registration through fraud, negligence or oversight. Local custody services still remain undeveloped and although the Funds have put in place certain control mechanisms, including the selection of agents to register securities on behalf of the Funds and regular audits of entries on relevant share and securities registers, there is a transaction, settlement and custody risk of dealing in Russian securities. At present, Russian securities are registered in book entry form only and are not in practice evidenced by any share certificates. Considerable delays may occur in the transfer of funds within Russia, the conversion of Roubles into other currencies and the remittance of monies outside of Russia. Delays may occur in the collection of dividends, proceeds of sales, redemption monies and other cash sums, possibly causing currency exchange loss, and some monies may not be received. In addition, due to the local postal and banking systems, it cannot be guaranteed that all entitlements attaching to securities acquired by the Fund, including in relation to dividends, can be realised.

Accounting and Auditing Practice
Accounting, auditing and financial reporting standards in Russia in some instances do not correspond to International Accounting Standards or are not equivalent to those applicable in more developed market economies. This is because accounting and auditing has been carried out solely as a function of compliance with tax legislation. The reliability and quality of information available to the Funds will therefore be less than in respect of investments in Western countries. Obligations on Russian companies to publish information may also be relatively limited, thus further restricting opportunities for the Funds to carry out due diligence.

Foreign Currency and Exchange Rates
The value of the assets of the Funds and their income, as measured in US dollars, may be affected by fluctuations in currency rates and Russian exchange control regulations. In addition Russia has experienced significant devaluations relative to the US dollar; the Russian Central Bank has taken steps to stabilise the value of the Rouble, which have included the use of foreign currency reserves; however, there can be no assurance that such steps will be taken in the future or that such steps, if taken, will be successful. Although the Rouble is internally convertible within Russia, there can be no guarantee of the liquidity or competitiveness of such currency markets. The Funds may attempt to mitigate the risks associated with currency fluctuations at times by entering into forward, futures or options contracts to purchase or sell the Rouble to the extent such possibilities are available on terms acceptable to the Funds. Changes in the regulations of these currency markets may lead to the Funds accumulating large quantities of non-convertible currency that may not be easily converted into hard currency.

Investment and Registration Restrictions
Russian foreign investment legislation at the present time provides general assurances of the rights of foreign investors to remit abroad profits and dividends from their investments in Russia. In some cases, however, these rights can be subject to currency, tax and export restrictions and there is no guarantee that all profits derived by the Funds within Russia will be capable of being remitted abroad. In certain cases, foreign investment in Russian companies is restricted; and these restrictions may be in a company’s unavailable constitutional documents and only become known after an investment in such a company has been made. The ability of the Funds to exchange Roubles into US dollars and repatriate investment income, capital and proceeds of sales realised from its investments is subject to regulation by the Russian Government and/or the Russian Central Bank authorities and these regulations may change without prior notice or warning.

Russian Taxation
A summary of the Manager’s understanding of current tax law and practice within Russia as it affects the Fund is set out in the section of the relevant Fund's prospectus headed TAXATION OF THE FUND. Russian tax law and practice is not as clearly established as that of Western nations and is under varying stages of review and revision. It is possible therefore that the current interpretation of the law or understanding of practice may change or that the law may be changed with retrospective effect. Accordingly, there is a possibility that the. Funds may become subject to taxation within Russia that is not anticipated either at the present time or when investments are made, valued or disposed of. No assurance can be given that the Funds will benefit from the current tax treaty arrangements that Russia has with other countries.

Environmental Concerns
Significant areas of Russia are seriously polluted and will need to be cleaned up. The lack of environmental control has led to widespread pollution of the air, ground and water resources. The legislative framework for environmental liability and the extent of any exposure of business to the costs of pollution clean up have not been established. The expense of solving this problem is variously estimated and will impose commensurate costs both on the State and also on private enterprise. Substantial liability for any business in which the Funds invest would have a significant adverse effect on the value of the Funds.

Legal System
Russia is a civil law jurisdiction based on many concepts familiar to a continental European lawyer. However, the volume of new legislation and breadth of the changes which have taken place has resulted in a lack of confidence in the courts to give clear and consistent judgements; the basic commercial laws are, themselves, unclear; Russian courts lack experience in commercial dispute resolution; many of the procedural remedies for enforcement and protection of legal rights usually found in Western jurisdictions are not available and the laws and regulations are continually evolving and may be subject to retroactive change and they are published by a variety of State bodies and complete compliance with legal rules and standards, including in relation to privatisation, has often been difficult to achieve. The effectiveness of legal regulation is subject to doubt, and the lack of enforcement is an issue and a risk; there may be difficulties for the Funds in protecting and enforcing their rights against Russian entities, it is likely that there will be difficulties in enforcing foreign court judgements in Russia and Russian court judgements in foreign jurisdictions, due to the limited number of countries that have mutual recognition of judgement treaties with Russia. Minority shareholders are offered very little protection under Russian regulatory controls and the laws on corporate governance. Disclosure requirements are, at best, minimal and the anti-insider trading legislation is very basic. The risk has been increased by the unstable political process. At present, Russia has no reliable system or legal framework regarding the registration of titles; therefore, there is no assurance that Russian courts will recognise or acknowledge the Funds' entitlement to any securities in which they have invested, or that they are the beneficial owner of any property or security held in the name of a nominee for the Funds.

Crime and Fraud
Russia suffers from corruption throughout its economic system. Many businesses are subject to theft or extortion and fraud. The Funds may have to cease or alter certain activities or liquidate certain investments as a result of criminal threats or activities.

Participation in Privatisation
Many recently privatised companies will have gone through changes in management in an attempt to make them more efficient in the private sector. It cannot be assumed that the new management will perform better than the old. The sudden loss of government support and protection occurring on privatisation, combined with the sudden increase in competition that such an enterprise will be confronted with, could have a negative effect on a newly privatised company. The transformation of medium and large-scale state enterprises into open joint stock companies and their privatisation has been carried out at a very fast rate by the Russian Stock Property Committee and Federal Property Fund. This has increased the risk of illegalities in the privatisation which may lead to the privatisation being fully or partially invalidated, or the company or its employees having sanctions imposed upon them. There is also the risk that the company does not have full or valid title to all of the assets shown on its balance sheet and may be subject to obligations arising from a period prior to privatisation. Disputes between management and shareholders have arisen as a result of the privatisation process. For example the management of certain companies has not recognised foreign investors’ investments in securities of the company. Incidents have been reported where foreign shareholders’ interests have been diluted by management through the issue of new securities to limited groups of existing shareholders.

Valuation of the Fund’s investments and of a Share
As a result of the illiquidity of the Russian securities markets it may be difficult to ascertain the true bid or offer value of an investment owned by the Funds. Consequently the issue or redemption price of a Share may not, at any given Dealing Day, truly reflect the value that would be realised at such moment in time had the Fund actually acquired or disposed of, as the case may be, the investments comprising the Fund at such time. Investors should be aware that the price of Shares can go down as well as up and that they may not realise their initial investment in Shares.

Russian Ownership Structures
There are a number of companies in Russia which are considered "strategic" and ownership of which is restricted to Russian legal entities and citizens. In some cases foreign investors are only able to invest into such companies through Russian structures. Although current Russian legislature may not disallow these schemes, there is no guarantee that the laws will not be changed in the future. Any change in the current legislature may cause the loss of the entire investment in such a scheme.