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Ontario Securities Commission
May 19, 2020
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IN THE MATTER OF
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THE SECURITIES LEGISLATION OF ONTARIO
(the Jurisdiction)
AND
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IN THE MATTER OF
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THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
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IN MULTIPLE JURISDICTIONS
AND
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IN THE MATTER OF
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WARATAH CAPITAL ADVISORS LTD.
(the Filer)
AND
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WARATAH ALTERNATIVE ESG FUND
(the Existing Fund)
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DECISION
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## Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the Existing Fund and similarly structured investment funds managed by the Filer (the Future Funds and, collectively with the Existing Fund, the Funds) for a decision under the securities legislation of the Jurisdiction (the Legislation) that exempts the Funds from the restrictions in subparagraph 2.6.1(1)(c)(v) and section 2.6.2 of NI 81-102 in order to permit each Fund to borrow securities from a borrowing agent to sell securities short whereby (A) the aggregate market value of all securities sold short by the Fund may exceed 50% of the net asset value of the Fund; and (B) the aggregate market value of securities sold short combined with the aggregate value of cash borrowed by the Fund may exceed 50% of the Fund’s net asset value, provided that, the aggregate market value of securities sold short combined with the aggregate amount of cash borrowed does not exceed 100% of the net asset value of the Fund (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for the Application;
(ii) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-202 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (the Other Jurisdictions and, together with the Jurisdiction, the Canadian Jurisdictions).
## Interpretation
Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined;
AIF means an annual information from of a Fund prepared in accordance with Form 81-101F2 – Contents of Annual Information Form under NI 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), as the same may be amended from time to time;
NAV means net asset value;
Prime Broker means any entity that acts as a lender or borrowing agent, as the case may be, to one or more investment funds;
Prospectus means a simplified prospectus of a Fund prepared in accordance with Form 81-101F1 – Contents of Simplified Prospectus under NI 81-101 as the same may be amended from time to time; and
Short Selling Limit means the limit of 50% of NAV for short sale transactions by alternative mutual funds set out in subparagraph 2.6.1(1)(c)(v) of NI 81-102.
## Representations
This decision is based on the following facts represented by the Filer:
### The Filer
1. The Filer is a corporation incorporated under the laws of the Province of Ontario. The head office of the Filer is in Toronto, Ontario.
2. The Filer is registered as an investment fund manager, portfolio manager and exempt market dealer in the Province of Ontario; an investment fund manager and exempt market dealer in the Province of Québec; and an exempt market dealer in the Provinces of British Columbia, Alberta; Manitoba, Saskatchewan, New Brunswick and Nova Scotia.
3. The Filer is the investment fund manager and portfolio manager of the Existing Fund and will be the investment fund manager and portfolio manager of the Future Funds. As such, the Filer is, or will be, responsible for managing the assets of the Funds and has, or will have, complete discretion to invest and reinvest the Funds’ assets and is, or will be, responsible for executing all portfolio transactions.
4. The Filer is not in default of applicable securities legislation in any of the Canadian Jurisdictions.
### The Funds
5. Each of the Funds is, or will be, organized as a trust established under the laws of the Province of Ontario or another Canadian Jurisdiction.
6. Each of the Funds is, or will be, an open-ended public alternative mutual fund governed by NI 81-102.
7. Units of the Funds are, or will be, offered by a Prospectus, AIF and fund facts documents filed in one or more of the Canadian Jurisdictions and, accordingly, each Fund is, or will be, a reporting issuer in the Canadian Jurisdictions where the Exemption Sought is relied upon.
### Reasons for the Exemption Sought
8. The investment objectives to be utilized by each of the Funds will differ but, in each case, a key investment strategy which may be utilized by a Fund will include the use of market-neutral, offsetting, inverse or shorting strategies requiring the use of short selling in excess of the Short Selling Limit.
9. Market-neutral strategies are well-recognized for limiting market risk, balancing long and short positions within an investment portfolio with the objective of providing positive returns regardless of whether the broader market rises, falls or is flat. Market-neutral strategies are designed to have less volatility than the broader market when measured over medium to long-term periods. Market-neutral strategies also provide diversification to investors as returns are intended to be uncorrelated to the performance of the broader market – such strategies are designed to effectively remove any “beta” component from their returns and investment exposures.
10. As part of an investment strategy, short positions can serve as both a hedge against exposure to a long position, or a group of long positions, and also as a source of returns with an offsetting long position or positions. The Funds will generally seek to generate an attractive risk/return profile independent of the direction of the broad equity markets. As such, at the portfolio level, these strategies seek to hedge out the Fund’s exposure to the direction of broad equity markets, and to generate positive performance from the difference, specifically, the spread between the performance of the portfolio’s long and short positions.
11. The investment strategies of each Fund permit, or will permit, it to sell securities short provided that, at the time the Fund sells a security short (i) the aggregate market value of securities of any one issuer (other than “government securities” as defined in NI 81-102) sold short by the Fund does not exceed 10% of the NAV of the Fund; and (ii) the aggregate market value of all securities sold short by the Fund does not exceed 100% of its NAV.
12. The investment strategies of each Fund permit, or will permit, it to enter into a cash borrowing (to a maximum of 50% of the Fund’s NAV) or short selling transaction, provided that the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the Fund does not exceed 100% of the Fund’s NAV (the Total Borrowing and Short Selling Limit). If the Total Borrowing and Short Selling Limit is exceeded, the Fund shall, as quickly as is commercially reasonable, take all necessary steps to reduce the aggregate value of cash borrowed combined with the aggregate market value of securities sold short to be within the Total Borrowing and Short Selling Limit.
13. The investment strategies of each Fund will permit the Fund to borrow cash, enter into specified derivatives transactions or sell securities short, provided that immediately after entering into a cash borrowing, specified derivative or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of securities sold short and aggregate notional amount of the Fund’s specified derivatives positions (other than positions held for hedging purposes
minicounsel