What risks are associated with investing in segregated funds?

Investing in segregated funds involves various risks, and the correct answer identifies three key types: market risk, interest rate risk, and liquidity risk.

Market risk pertains to the fluctuations in the value of the underlying assets within the segregated fund. Since these funds often invest in equities or other market instruments, their performance is directly influenced by market conditions. Consequently, if the market underperforms, the value of the segregated fund can decline, leading to potential losses for investors.

Interest rate risk is relevant particularly when the segregated funds include fixed-income securities. When interest rates rise, the value of existing bonds tends to fall, which can negatively impact the overall return of the fund.

Liquidity risk is another important factor, reflecting the challenges that an investor may face when attempting to withdraw funds. Segregated funds typically come with investment lock-in periods or surrender charges that can limit access to capital. This means that, while an investor may wish to liquidate their holdings, the process may not be straightforward without incurring costs.

Including all three risks—market, interest rate, and liquidity—provides a comprehensive view of the potential challenges associated with investing in segregated funds, making this option the most accurate and informative response.