Ontario Securities Commission
March 14, 2024
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 EHP FUNDS INC. (the Filer)
AND
IN THE MATTER OF EHP GLOBAL MULTI-STRATEGY ALTERNATIVE FUND (the Top Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the Top Fund, which holds securities of EHP Advantage Alternative Fund and EHP Foundation Alternative Fund (the Underlying Funds and, each, an Underlying Fund), for a decision under the securities legislation (Legislation) of the Jurisdiction granting an exemption from paragraph 2.5(2)(b) of National Instrument 81-102 - Investment Funds (NI 81-102) to permit the Top Fund to hold securities of the Underlying Funds (as defined below), each which Underlying Fund in turn will hold more than 10% of its net asset value (NAV) in securities of one or more investment funds (the Third Tier Funds and, each, a Third Tier Fund) (each, a Three-Tier Structure) (the Exemption Sought). The Third Tier Funds may be comprised of: (i) one or more other mutual funds, each of which is, or will be, subject to NI 81-102 and managed by the Filer or an affiliate thereof (each, an EHP Third Tier Fund, and, together with the Top Fund and the Underlying Funds, the Funds and, each, a Fund); and (ii) one or more other investment funds (the Other Funds and, each, an Other Fund).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the Application; and
(b) the Filer 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 (together with Ontario, the Jurisdictions).
Defined Terms
Unless expressly defined herein, terms in this Application have the respective meanings given to them in NI 81‑102, National Instrument 14‑101 - Definitions or MI 11‑102.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation incorporated under the laws of the Province of Ontario, with its head office located in Toronto, Ontario.
The Filer is registered as an investment fund manager in Ontario, Québec, and Newfoundland and Labrador and as a portfolio manager in Ontario.
The Filer or an affiliate is, or will be, the investment fund manager of the Top Fund, each Underlying Fund, and each EHP Third Tier Fund.
The Filer is not in default of securities legislation in any of the Jurisdictions.
The Funds
Each Fund is, or will be, an “alternative mutual fund” organized and governed by the laws of a Jurisdiction or the laws of Canada.
Each Fund is, or will be, a reporting issuer in one or more Jurisdictions governed by the provisions of NI 81-102, subject to any exemption therefrom that has been, or may be, granted by the securities regulatory authorities.
The securities of the Underlying Funds and the EHP Third Tier Funds may be sold to investors other than the Top Fund and Underlying Funds, respectively.
None of the Funds is in default of securities legislation in any of the Jurisdictions.
The Top Fund
The investment objective of the Top Fund is to generate superior risk adjusted investment returns over the long‐term by utilizing a multi‐strategy approach consisting of diversified quantitative and systematic investment strategies.
The Top Fund currently seeks to achieve its investment objective by investing in securities of alternative mutual funds managed or advised by the Manager, including the Underlying Funds, which in turn invest in long and short positions in high-yield bonds, investment grade corporate bonds, government bonds, convertible bonds, convertible debentures, preferred shares, options, futures, forward contracts, currencies, volatility instruments, short term debt instruments, distressed debt, cash and cash equivalents, equities, fixed-income exchange-traded funds (ETFs), equity ETFs, special purpose acquisition companies (SPACs), and other alternative mutual funds.
The Top Fund wishes to have the ability to purchase securities of the Underlying Funds, each of which will hold more than 10% of its NAV in securities of the Third Tier Funds, as described below.
The Top Fund will not sell short securities of any Underlying Fund.
The Underlying Funds
The investment objective of EHP Advantage Alternative Fund is to generate superior risk adjusted investment returns over the long-term by utilizing a multi-strategy approach consisting of diversified quantitative and systematic investment strategies. EHP Advantage Alternative Fund will use alternative investment strategies, including equity long/short, equity market neutral, and credit long/short, by investing in North American equities, fixed-income ETFs, equity ETFs, and treasury futures derivative contracts as a part of implementing these strategies.
The investment objective of EHP Foundation Alternative Fund is to provide a positive total return, regardless of market conditions or general market direction, with low correlation to North American equity markets. EHP Foundation Alternative Fund will use alternative investment strategies, including equity long/short, equity market neutral, and credit long/short, by investing in North American equities, fixed-income ETFs, equity ETFs, and treasury futures derivative contracts as a part of implementing these strategies.
Each Underlying Fund may invest in securities of Other Funds, including the EHP Third Tier Funds and ETFs, in accordance with its investment objective.
Each Underlying Fund currently invests in one or more Other Funds, where, at the time of purchase, the Underlying Fund holds, in aggregate, no more than 10% of its NAV in securities of such Other Funds, which excludes, for greater certainty, index participation units.
Each Underlying Fund wishes to invest in one or more EHP Third Tier Funds for tactical purposes, which investments will, when aggregated with securities of Other Funds held by the Underlying Fund (excluding index participation units), immediately after purchase, comprise, in aggregate, up to 30% of the NAV of the Underlying Fund.
As a result of market movement, Third Tier Funds may comprise more than 30% of the NAV of an Underlying Fund at any time.
No Underlying Fund will sell short securities of a Third Tier Fund, excluding index participation units.
General
Subsection 2.5(2)(b) of NI 81-102 prohibits an investment fund from investing in another investment fund if, at the time of purchase, the other investment fund has more than 10% of its net assets invested in securities of other investment funds (the Multi-Tier Prohibition).
Since an Underlying Fund's investment in securities of the Third Tier Funds may, from time to time, exceed 10% of the NAV of the Underlying Fund, the Multi-Tier Prohibition will prohibit the Top Fund from investing in the Underlying Fund.
An investment by the Top Fund in an Underlying Fund would not qualify for the exemptions in paragraph 2.5(4) of NI 81-102 from the Multi-Tier Prohibition because the Underlying Funds do not issue index participation units and are not clone funds or money market funds.
An investment in the Underlying Funds by the Top Fund is an efficient and cost-effective alternative to administering one or more investment strategies directly.
An investment by the Top Fund in an Underlying Fund or by an Underlying Fund in a Third Tier Fund represents the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Fund or the applicable Underlying Fund, as the case may be.
The Other Funds are managed by investment fund managers other than the Filer and its affiliates. Neither the Filer nor its affiliates manage any Other Funds.
There will be no duplication of management fees or incentive fees between the Top Fund and the Underlying Funds, and between the Underlying Funds and the EHP Third Tier Funds. The prospectus of the Top Fund and the Underlying Funds will disclose that management fees and incentive fees will not be duplicated amongst such Funds as a result of a Three-Tier Structure.
Three-Tier Structure
The Filer will foster standards of fairness in the allocation of orders policy, the purpose of which is to seek the fair treatment for investors in all investment funds managed by the Filer that are involved in a fund of fund structure by assessing material costs between funds that pertain to transaction charges. This policy is designed to isolate material and/or excessive transaction costs associated with significant trades, at the Filer’s discretion, and to prevent the dilution of a fund's assets when these material transactions occur by taking steps to ensure that the applicable fund or funds bear(s) the appropriate economic impact of such transaction costs.
The Filer will implement a liquidity risk management policy, the purpose of which is to monitor underlying liquidity of investment funds managed by the Filer, with each such investment fund potentially considered a large unitholder investment. This policy seeks to ensure that unitholders are not adversely impacted by trading activities of large unitholders.
To manage liquidity risk due to cross-ownership of funds within a Three-Tier Structure, the Filer will use a combination of risk management tools to address the significant investor risk, including: (i) Independent Review Committee (or IRC) approved governance policies that have been adopted to protect all investors in the Funds; (ii) internal portfolio manager notification requirements of significant cash flows into the Funds; (iii) ongoing liquidity monitoring of each Fund’s portfolio; and (iv) real time cash projection reporting for the Funds. Each Fund in a Three-Tier Structure will be managed as a stand-alone investment for purposes of the application of these risk management tools,
The prospectus of the Top Fund discloses or will disclose in the next regularly scheduled renewal, or amendment if earlier, that the Top Fund invests in securities of the Underlying Funds, and that each Underlying Fund may invest more than 10% of its NAV in securities, on an aggregate basis, of other investment funds, including Third Tier Funds.
The prospectus of each Fund in a Three-Tier Structure discloses or will disclose in the next regularly scheduled renewal, or amendment if earlier, that the accountability for portfolio management is: (a) at the level of each Underlying Fund with respect to the selection of Third Tier Funds to be purchased by the Underlying Fund and with respect to the purchase and sale of any other portfolio securities or other assets held by the Underlying Fund; and (b) at the level of each EHP Third Tier Fund with respect to the purchase and sale of portfolio securities and other assets held by that EHP Third Tier Fund.
Each Fund in a Three-Tier Structure complies with the requirements under National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81-106) relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 - Contents of Fund Facts Document (Form 81-101F3) relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Fund was investing directly in the Third Tier Funds.
None of the Funds relies on any discretionary relief permitting the Fund to exceed the leverage exposure otherwise permitted under NI 81-102 through the use of borrowing, short selling, and specified derivatives.
Except for paragraph 2.5(2)(b) of NI 81-102, each investment by the Top Fund in securities of the Underlying Funds will be made in accordance with the provisions of section 2.5 of NI 81-102.
It would not be prejudicial to the public interest to grant the Exemption Sought.
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:
(i) the Filer is the registered investment fund manager of the Top Fund, each Underlying Fund, and each EHP Third Tier Fund;
(ii) an investment by the Top Fund in securities of the Underlying Funds is in accordance with the investment objectives and strategies of the Top Fund;
(iii) the prospectus of the Top Fund discloses or will disclose in the next regularly scheduled renewal, or amendment if earlier, that the Top Fund invests in securities of the Underlying Funds, and that each Underlying Fund may invest more than 10% of its NAV in securities, on an aggregate basis, of other investment funds, including Third Tier Funds;
(iv) the Top Fund’s investment in securities of each Underlying Fund and each Underlying Fund’s investment in each Third Tier Fund in a Three-Tier Structure is otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirement;
(v) there is no duplication of management fees, incentive fees or administrative fees between each tier of the Three-Tier Structure;
(vi) the Three-Tier Structure is implemented in a manner that seeks the fair treatment for investors in all of the investment funds managed by the Filer that are involved in a Three-Tier Structure by assessing material portfolio transaction costs among all of such investment funds;
(vii) the Filer maintains investor protection policies and procedures that address liquidity and redemption risk due to cross-ownership of funds within a Three-Tier Structure, and each Fund in a Three-Tier Structure is managed as a stand-alone investment for purposes of these policies and procedures;
(viii) each Fund in a Three-Tier Structure complies with the requirements under NI 81-106 relating to top 25 positions portfolio holdings disclosure in its management reports of fund performance and the requirements of Form 81-101F3 relating to top 10 position portfolio holdings disclosure in its Fund Facts as if the Fund was investing directly in the Third Tier Funds; and
(ix) none of the Funds relies on any discretionary relief permitting the Fund to exceed the leverage exposure otherwise permitted under NI 81-102 through the use of borrowing, short selling, and specified derivatives.
“Darren McKall”
Darren McKall, Manager Investment Funds and Structured Products Branch Ontario Securities Commission
Application # 2024/0093 SEDAR+ #6087484