Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted to commodity pools from paragraphs 2.5(2)(a), (b) and (c) of National Instrument 81-102 Mutual Funds to permit existing commodity pools to invest, or continue investing, in underlying assets without using a forward agreement in response to adverse tax regulation - Relief granted to commodity pools to gain exposure to a portfolio of assets by way of a second commodity pool, subject to certain conditions – the second commodity pool has filed a non-offering long form prospectus and is a reporting issuer subject to National Instrument 81-106 Investment Fund Continuous Disclosure, and operates in accordance with National Instrument 81-102 Mutual Funds, as modified by National Instrument 81-104 Commodity Pools – Each commodity pool has no non-cash investment other than the second commodity pool - second commodity pool has no investor other than the commodity pool - investment in the third portfolio limited to 10% of the net assets of the commodity pool.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, paragraphs 2.5(2)(a), 2.5(2)(b), 2.5(2)(c) and section 19.1.
January 16, 2014
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
MAN INVESTMENTS CANADA CORP.
(the Filer)
AND
IN THE MATTER OF
MAN CANADA AHL ALPHA FUND
(the AHL Alpha Fund)
AND
IN THE MATTER OF
MAN CANADA AHL dp investment fund
(the AHL DP Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the AHL Alpha Fund and the AHL DP Fund(collectively, the Funds and individually each a Fund), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation):
(i) to revoke and replace the Prior Evolution Exemption (as defined below); and
(ii) to grant exemptive relief pursuant to paragraph 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102), from the requirements contained in subsections 2.5(2)(a), (b) and (c) of NI 81-102 in order to permit the Funds to gain exposure to the AHL Evolution Programme (as defined herein) through securities of AHL Evolution Limited (as defined herein) to be held in the AHL Portfolios (as defined herein),
(collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application,
(b) the Fund has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (collectively, with Ontario, the Jurisdictions).
Interpretation
Terms defined in NI 81-102, MI 11-102 and National Instrument 14-101 Definitions have the same meanings if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation incorporated under the Canada Business Corporations Act. The Filer’s head office is located in Toronto, Ontario.
The Filer is the trustee and manager of the Funds.
The Filer is registered as an Investment Fund Manager in Ontario, Quebec and Newfoundland and Labrador, as an adviser in the category of Portfolio Manager in Ontario and Alberta and as a dealer in the category of Exempt Market Dealer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia.
The Funds
Each Fund is a mutual fund to which NI 81-102 applies. The securities of each Fund are qualified for distribution in each of the Jurisdictions pursuant to a prospectus that has been prepared and filed in accordance with the securities legislation of the Jurisdictions. Accordingly, each Fund is a reporting issuer in each of the Jurisdictions.
Each Fund is a commodity pool, as such term is defined in National Instrument 81-104 Commodity Pools (NI 81-104), in that each of the Funds has adopted fundamental investment objectives that permit the Funds to invest in financial instruments in a manner that is not permitted under NI 81-102.
Each of the Fund’s investment objective is to provide investors with the opportunity to realize capital appreciation through investment returns that have a low correlation to traditional forms of stock and bond securities. Accordingly, each Fund provides the opportunity for added diversification and to enhance the risk/reward profile of conventional investment portfolios.
The AHL Alpha Fund obtains economic exposure to the returns of a diversified portfolio of financial instruments across a range of global markets including, currencies, bonds, stocks, energies, metals, agriculturals and interest rates (the AHL Alpha Portfolio) managed by AHL Partners LLP (the Investment Manager), an affiliate of the Filer, using a multi-strategy trading program (the AHL Alpha Programme).
The AHL DP Fund obtains exposure to the returns of a diversified portfolio of financial instruments across a range of global markets including, without limitation, stocks, bonds, currencies, short-term interest rates, energy, metals and agricultural commodities (the AHL DP Portfolio and, together with the AHL Alpha Portfolio, the AHL Portfolios) managed by the Investment Manager using a predominantly trend-following trading program (the AHL Diversified Programme).
The Bottom Funds
Each of the AHL Portfolios is held by an exempted company incorporated with limited liability in the Cayman Islands (collectively, the Bottom Funds and individually each a Bottom Fund).
Each Bottom Fund has filed and obtained a receipt for a non-offering prospectus, pursuant to which it became a reporting issuer under the Securities Act (Ontario) and the Securities Act (Québec) and subject to the continuous disclosure requirements of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106). Accordingly, the financial statements and other reports required to be filed by each Bottom Fund are available through SEDAR.
The assets of each Bottom Fund are managed by the Investment Manager. The Investment Manager is a limited liability partnership established in England and a member of Man Group plc and is authorised and regulated by the United Kingdom Financial Conduct Authority in the conduct of its regulated activities in the United Kingdom.
The assets of each Bottom Fund are invested in accordance with the AHL Alpha Programme or the AHL Diversified Programme, respectively. Each Bottom Fund has adopted and is subject to the investment restrictions and practices contained in NI 81-102 and is managed in accordance with these restrictions and practices, except as otherwise permitted by NI 81-104 and any prior exemptive relief obtained by each of the Funds, respectively.
Each Fund initially obtained exposure to the respective Bottom Fund, and thus to the economic returns of the respective AHL Portfolio through one or more forward sale agreements (each a Forward Agreement) entered into with one or more Canadian chartered banks and/or their affiliates (each a Counterparty).
Pursuant to the April 30, 2009 decision In the Matter of Man Canada AHL Alpha Fund, the AHL Alpha Fund obtained exemptive relief from the restrictions in subsections 2.5(2)(a) and (c) of NI 81-102 to permit it to obtain exposure to the AHL Alpha Portfolio by entering into a Forward Agreement with exposure to securities of a Bottom Fund.
Pursuant to the November 9, 2009 decision In the Matter of Man Canada AHL DP Investment Fund, the AHL DP Fund obtained exemptive relief from the restrictions in subsections 2.5(2)(a) and (c) of NI 81-102 to permit it to obtain exposure to the AHL DP Portfolio by entering into a Forward Agreement with exposure to securities of a Bottom Fund. On November 22, 2013, the decision In the Matter of Man Canada AHL DP Investment Fund revoked and replaced the November 9, 2009 decision and granted exemptive relief from subsections 2.5(2)(a) and (c) of NI 81-102 to permit it to purchase and hold securities of the Bottom Fund directly in order to obtain exposure to the AHL DP Portfolio.
Each Bottom Fund does not have any securityholder other than the respective Fund (or a Counterparty with which the Fund has entered into a Forward Agreement) to which the Bottom Fund is referable. Other than cash and cash equivalents, the Funds do not have any investments other than direct or indirect exposure to their respective Bottom Funds. Each of the Funds will have substantially the same investment objectives as their respective Bottom Funds in that they obtain exposure to a trading program that invests in a portfolio of futures, forward contracts, swaps and other financial derivative instruments both on and off exchange that is implemented and managed by the Investment Manager and held by their respective Bottom Fund. The Investment Manager uses cash investments to manage the Fund’s leverage.
As a complementary investment strategy, the AHL DP Fund currently has exposure of up to 10% of its net asset value in the AHL Evolution Programme (as defined below) through its Bottom Fund. Pursuant to the February 24, 2012 decision In the Matter of Man Canada AHL DP Investment Fund, the AHL DP Fund obtained exemptive relief from the restrictions in subsections 2.5(2)(a) and (c) of NI 81-102 (the Prior Evolution Exemption) to permit it to indirectly gain exposure to the AHL Evolution Programme through AHL Evolution Limited held in the AHL DP Portfolio, provided that, among other things, the exposure to AHL Evolution Limited in the AHL DP Portfolio did not in the aggregate represent more than 10% of the net asset value of the AHL DP Portfolio.
Similar to the AHL DP Fund, the AHL Alpha Fund would like to gain exposure (of not more than 10%) to the AHL Evolution Programme through its Bottom Fund.
Changes to Tax Legislation
The character conversion measure announced in the Federal Government's Economic Action Plan 2013 (the May 2013 Tax Proposals) effectively prevents investment funds, including the Funds, from increasing the notional amount of existing derivative forward agreements, including the Forward Agreements, after March 20, 2013. Accordingly, in order to issue additional units, each of the Funds will purchase and hold securities of the Bottom Fund and will not obtain additional exposure to the securities of the Bottom Fund through a Forward Agreement or other specified derivative.
The Exemption Sought is required to permit the AHL DP Fund to continue, and permit the AHL Alpha Fund to commence, to gain exposure of up to 10% of each Fund’s net asset value to the AHL Evolution Programme through AHL Evolution Limited held in the respective AHL Portfolio, as similarly prescribed under the Prior Evolution Exemption prior to the May 2013 Tax Proposals.
The AHL Evolution Programme
The AHL Evolution Programme (the AHL Evolution Programme) is a trading program that invests in a portfolio of futures, forward contracts, swaps and other financial derivative instruments both on and off exchange. The markets covered include both developed and emerging markets. The AHL Evolution Programme is implemented and managed by the Investment Manager.
Trading in the AHL Evolution Programme may focus upon inefficiencies in a whole range of markets including, but not limited to, markets for bonds, commodities, credit, stocks and currencies. Strategies capitalizing on these inefficiencies include price momentum and relative value. In addition, non-directional trading strategies may be added from time to time. The AHL Evolution Programme trades in a number of markets not accessed by the AHL Alpha Programme and the AHL Diversified Programme. These markets may be accessed directly or indirectly and include, without limitation, credit indices, cash bonds, interest rate swaps, electricity and emerging market currencies and stock indices.
In order to access the AHL Evolution Programme, a portion of the assets of each AHL Portfolio will be invested in a class or series of redeemable non-voting participating shares (the AHL Evolution Shares) issued by AHL Evolution Limited (AHL Evolution Limited), which invests its assets in accordance with the AHL Evolution Programme.
AHL Evolution Limited is subsisting as an exempted company with limited liability in Bermuda under the provisions of the Companies Act 1981 of Bermuda and is an open-ended mutual fund authorized as an institutional investment fund by the Bermuda Monetary Authority in Bermuda and regulated under the Investment Funds Act 2006 of Bermuda.
The AHL Evolution Shares provide exposure to the AHL Evolution Programme which invests in, or gains exposure to, the same financial instruments that, in accordance with the fundamental investment objectives and restrictions of each of the Funds and each of the Bottom Funds and with NI 81-102, as modified by NI 81-104, the Bottom Funds could acquire directly. The AHL Evolution Shares are attractive investments for the AHL Portfolios as they provide an efficient and cost effective method of achieving exposure to the AHL Evolution Programme.
The Investment Manager also serves as the investment manager of AHL Evolution Limited. There are no management fees or incentive fees paid to the Investment Manager by AHL Evolution Limited in connection with the investment management services provided by the Investment Manager in respect of the assets of AHL Evolution Limited.
The Fund’s exposure to the AHL Evolution Shares in the portfolio of a Bottom Fund will not in the aggregate represent more than 10% of the net asset value of the Fund. The Investment Manager will manage the investments of each Fund and Bottom Fund to ensure that each Fund’s exposure to the AHL Evolution Shares will not be more than 10% of its net asset value.
In the absence of the Exemption Sought being granted, the Funds would not be permitted to gain exposure to the AHL Evolution Programme by means of the AHL Evolution Shares in the AHL Portfolios because AHL Evolution Limited is not subject to NI 81-101 and NI 81-102, each Bottom Fund may invest more than 10% of its net asset value in AHL Evolution Shares and the securities of AHL Evolution Limited are not qualified for distribution in the local jurisdiction, contrary to the requirements of subsections 2.5(2)(a), (b) and (c) of NI 81-102.
An investment by each of the Bottom Funds in AHL Evolution Shares will be made in accordance with the investment restrictions contained in NI 81-102 and NI 81-104, except for the restrictions in subsections 2.5(2)(a) and (c) of NI 81-102.
The Investment Manager will monitor the investment restrictions of each Bottom Fund and AHL Evolution Limited. If the Investment Manager becomes aware of any breach of the investment restrictions, appropriate action and notification to the directors and manager of the Bottom Fund will be taken to bring the Bottom Fund back within the investment restrictions as soon as practicable.
None of the Filer, the Funds or the Bottom Funds is in default of any securities legislation in any of the Jurisdictions.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted, provided that:
(a) each Fund is a commodity pool subject to NI 81-102 and NI 81-104;
(b) each Bottom Fund has adopted and is subject to the investment restrictions and practices contained in NI 81-102 and is managed in accordance with these restrictions and practices, except as otherwise permitted by NI 81-104 and any exemptive relief obtained by the Funds;
(c) the exposure of a Fund to securities of a Bottom Fund is in accordance with the fundamental investment objectives of the Fund;
(d) the fundamental investment objective of each Fund, as disclosed in the next filed prospectus, discloses the name of the respective Bottom Fund and provides that the Fund will obtain exposure to their respective AHL Portfolio by investing in, or obtaining exposure by virtue of a Forward Agreement, to the securities of their respective Bottom Funds;
(e) the prospectus of each Fund discloses that the Fund will obtain exposure to securities of the Bottom Fund and, to the extent applicable, the risks associated with such an investment;
(f) each Bottom Fund is a reporting issuer subject to NI 81-106;
(g) no securities of a Bottom Fund are distributed in Canada other than to a Fund or to a Counterparty under a Forward Agreement;
(h) other than cash and cash equivalents, the Funds will not have any investments other than direct or indirect exposure to securities of their respective Bottom Funds;
(i) the investment by a Fund in securities of a Bottom Fund is made in compliance with each provision of section 2.5 of NI 81-102, except subsections 2.5(2)(a), (b) and (c) of NI 81-102;
(j) the exposure of the Fund to the AHL Evolution Shares in the portfolio of a Bottom Fund do not in the aggregate represent more than 10% of the net asset value of the Fund;
(k) the AHL Evolution Shares provide exposure to the same financial instruments that, in accordance with the fundamental investment objectives and restrictions of each of the Funds and each of the Bottom Funds and with NI 81-102, as modified by NI 81-104, the Bottom Funds could acquire directly;
(l) each Bottom Fund provides disclosure regarding its investment in the AHL Evolution Shares and exposure to the AHL Evolution Programme, in its annual information form and other applicable continuous disclosure documents that it will file on SEDAR; and
(m) financial statements of AHL Evolution Limited are provided to any securityholder of a Fund that requests them from the Filer.
“Darren McKall”
Darren McKall
Manager, Investment Funds
Ontario Securities Commission
SEDAR Project No. 2015487