In the Matter of Picton Mahoney Asset Management, 2025 CanLII 46499

May 21, 2025

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 PICTON MAHONEY ASSET MANAGEMENT (the Filer)

AND

IN THE MATTER OF THE FUNDS (as defined below)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the funds listed in Schedule “A” hereto (the Existing Funds) and any additional alternative mutual funds (the Future Funds and together with the Existing Funds, the Funds) of which the Filer, or an affiliate of the Filer, may be the manager, portfolio advisor and/or trustee in the future, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that grants relief to each of the Funds from:

(a) subparagraph 2.6.1(1)(c)(iv) of National Instrument 81-102 Investment Funds (NI 81-102), which restricts a Fund from short selling the securities of a single issuer, other than government securities (as such term is defined in NI 81-102), to not more than 10% of the NAV of the Fund;

(b) subparagraph 2.6.1(1)(c)(v) of NI 81-102, which restricts a Fund from selling a security short if, at the time, the aggregate market value of the securities sold short by the Fund exceeds 50% of the Fund’s NAV; and

(c) section 2.6.2 of NI 81-102, which states that a Fund not borrow cash or sell securities short if, immediately after entering into a cash borrowing or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the Fund would exceed 50% of the Fund’s NAV,

in order to permit each Fund to short sell Government Securities (as defined below) up to a maximum of 300% of its NAV (collectively, the Requested Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:

(d) the Ontario Securities Commission is the principal regulator for this Application, and

(e) the Filer has provided notice that section 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).

Interpretation

Terms defined in National Instrument 14-101 – Definitions, NI 81-102, MI 11-102, or in the Securities Act (Ontario) have the same meaning if used in this decision, unless otherwise defined herein. In addition to the defined terms used in this decision, capitalized terms used in this decision have the following meanings:

Current Decisions means, collectively, (i) In the Matter of Picton Mahoney Asset Management and the Funds dated July 7, 2020 (the 2020 Decision), and (ii) In the Matter of Picton Mahoney Asset Management and the Funds dated October 12, 2023 (the 2023 Decision);

Government Security includes and is limited to: (a) a “government security” as defined in NI 81-102; and (b) an evidence of indebtedness issued, or fully and unconditionally guaranteed as to principal and interest, by any of the federal government of the United Kingdom (U.K.) or the federal government of Germany;

IPU Issuer means an investment fund the securities of which are index participation units; and

NAV means net asset value.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a general partnership established under the laws of the Province of Ontario, with its head office located at 33 Yonge Street, Suite 320, Toronto, Ontario M5E 1G4.

2. The Filer is registered in the categories of (a) portfolio manager and exempt market dealer in the Provinces of Alberta, British Columbia, Manitoba, Ontario, Prince Edward Island, Quebec and Saskatchewan, (b) exempt market dealer in the Province of Newfoundland and Labrador, (c) investment fund manager in the Provinces of Ontario, Newfoundland and Labrador and Quebec and (d) commodity trading manager in the Province of Ontario.

3. The Filer, or an affiliate of the Filer, is, or will be, the manager, portfolio advisor and/or trustee of the Funds.

4. The Filer is not in default of securities legislation in any of the Jurisdictions.

The Funds

5. Each of the Funds is an alternative mutual fund established as a trust and governed by the laws of the Province of Ontario.

6. Each of the Funds is a reporting issuer in each of the Jurisdictions.

7. None of the Existing Funds are in default of any of the requirements of securities legislation in any of the Jurisdictions.

8. Each of the Funds offers, or will offer, as the case may be, one or more classes of mutual fund units and, if applicable, one or more classes of exchange-traded units.

9. Each of the Funds is, or will be, as the case may be, an alternative mutual fund (as defined in NI 81-102) governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

10. Each of the Existing Funds has filed and been receipted for a simplified prospectus qualifying the units of the Existing Funds for distribution to the public in each of the Jurisdictions.

11. The exchange traded units of the Funds are, or will be, as the case may be, listed for trading on a stock exchange in Canada (including the Toronto Stock Exchange and Cboe Canada Inc.).

12. The investment objective(s) of each of the Funds is, or will be, as the case may be, set out in the Fund’s simplified prospectus.

Interest Rate Risk Hedging Strategy

13. Each of the Funds invests, or will invest, in fixed income instruments of issuers located in Canada, the U.S., the U.K. and Europe and seeks, or will seek, to hedge its interest rate exposure by using a short-selling hedging strategy. Since the value of fixed income securities is influenced by interest rate changes (i.e., bond prices usually decrease as interest rates increase, while bond prices usually increase as interest rates decrease), interest rate volatility can adversely affect a Fund’s performance and impede its ability to achieve stable risk-adjusted returns in a manner that is consistent with its investment objectives.

14. In order to hedge against the inherent interest rate risk associated with fixed income securities invested in by the Funds, the Filer enters into, or will enter into, short selling arrangements relating to Government Securities at the same time that the Fund invests, or will invest, in long positions in the fixed income securities (the Interest Rate Risk Hedging Strategy).

Requested Relief

15. The short selling limits set forth in subparagraph 2.6.1(1)(c)(v) and section 2.6.2 of NI 81-102 require that the aggregate market value of all securities sold short by a Fund does not exceed 50% of its NAV. The 2020 Decision increases this limit to 100% of the Fund’s NAV.

16. The short selling limits set forth in subparagraph 2.6.1(1)(c)(iv) of NI 81-102 requires that the aggregate market value of securities of any one issuer (other than "government securities" as defined in NI 81-102) sold short by a Fund does not exceed 10% of the NAV of the Fund. The 2023 Decision increases this limit to 100% of the Fund’s NAV for IPU Issuers only.

17. NI 81-102 otherwise permits the Funds to obtain the additional leveraged short exposure through the use of specified derivatives, up to an aggregate exposure of 300% of the Fund’s NAV, in compliance with section 2.9.1 of NI 81-102 (the Aggregate Exposure Limit).

18. The Filer is of the view that the Funds would benefit from supplementing the Current Decisions by expanding the definition of “government securities” beyond the definition in NI 81-102 (namely, “an evidence of indebtedness issued, or fully and unconditionally guaranteed as to principal and interest, by any of the government of Canada, the government of a jurisdiction or the government of the United States of America”) to include government securities issued by, or fully and unconditionally guaranteed as to principal and interest by, the federal governments of the U.K. and Germany, and to permit a Fund to short sell Government Securities up to a maximum of 300% of its NAV for the following reasons:

(a) the Filer believes that the investment objectives and hedging strategies of the Funds represent an important investment diversification tool for Canadian investors;

(b) in order to provide investors with a high degree of diversification, and in line with their respective investment objectives the Funds invest, or will invest, in a variety of fixed income securities, including corporate debt securities of Canadian, U.S., U.K. and European issuers in their local markets and currencies;

(c) the Filer seeks greater flexibility to implement its interest rate risk hedging strategy on behalf of the Funds by short selling a wider variety of government securities than is permitted under the Legislation. The Filer notes that an increased ability to short sell securities issued by, or fully and unconditionally guaranteed as to principal and interest by, the U.K. and/or German governments in particular will enable the Funds to implement and benefit from more effective interest rate risk hedging strategies;

(d) each of the U.K. and Germany is a G7 member alongside Canada and the U.S. and the debt securities of each of these countries remains highly rated by independent credit rating agencies. Currently, the government debt of all four of these countries is rated AA or higher by Standard & Poor’s, with similarly high ratings from other major ratings agencies;

(e) German government securities are highly liquid and stable securities that, in the Filer’s experience, can effectively be utilized as part of the short selling interest rate risk hedging strategies utilized by the Funds in relation to Euro denominated fixed income securities issued by corporate entities not just within Germany but also the broader European Union;

(f) the markets for securities issued by the governments of the U.K. and Germany are highly developed and can provide superior liquidity and risk mitigation opportunities compared to the use of Canadian and U.S. government securities when the goal is to minimize the risks associated with investments in U.K. and European fixed income securities;

(g) unlike the short selling of equity securities, the total possible loss when short selling government issued securities is quantifiable at time of trade. The total exposure to loss on the short sale of a government security is the sum of all future coupon payments on the security, plus the difference between the trade price and par value of the security. As a result, the Funds are not (or will not be) exposed to any greater risk of significant losses by engaging in the short selling of government securities of the U.K. or Germany;

(h) the Filer has experience managing the strategies described herein in the Existing Funds;

(i) while derivatives may be used to manage interest rate risk, the Filer views the use of derivatives in an interest rate risk hedging strategy as more inefficient, complex and potentially riskier than a hedging strategy of managing interest rate risk through the physical short selling of Government Securities which has been demonstrated to be an effective and economically efficient strategy to mitigate the interest rate risk that is inherent in investments in corporate fixed income securities;

(j) the Filer believes that the Funds will not be exposed to any greater risk of significant losses by engaging in the short selling of securities issued by the governments of the U.K. and/or Germany; and

(k) the Filer believes that permitting the Funds to engage in increased short selling of securities issued by the governments of the U.K. and/or Germany in accordance with the terms of this decision, will maximize the assets of the Funds which can be deployed in furtherance of the investment objectives of the Funds without increasing the risk to the Funds relating to the settlement of such short sale transactions.

19. Each short sale transaction made by a Fund will be consistent with the Fund’s investment objectives and investment strategies.

20. Each Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives transactions will not exceed 300% of the Fund’s NAV, in compliance with the Aggregate Exposure Limit.

21. Each of the Funds will implement the following controls when conducting a short sale:

(a) the Fund will assume the obligation to return to the borrowing agent the securities borrowed to effect the short sale;

(b) the Fund will receive cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;

(c) the Filer will monitor the short positions of the Fund at least as frequently as daily;

(d) the security interest provided by the Fund over any of its assets that is required to enable the Fund to effect a short sale transaction is made in accordance with section 6.8.1 of NI 81-102 and with industry practice for that type of transaction and relates only to obligations arising under such short sale transactions;

(e) the Fund will maintain appropriate internal controls regarding short sales, including written policies and procedures for the conduct of short sales, risk management controls and proper books and records; and

(f) the Filer and the Fund will keep proper books and records of short sales and all of its assets deposited with borrowing agents as security.

22. Each Fund’s prospectus will contain adequate disclosure of the Fund’s short selling activities, including material terms of the Requested Relief.

23. The Filer will continue to comply with the terms of the Current Decisions except as modified by the Requested Relief.

24. The Filer submits that it would not be prejudicial to the public interest to grant the Requested Relief.

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 Requested Relief is granted, provided that:

(a) each short sale will be made consistent with the Fund’s investment objectives, Interest Rate Risk Hedging Strategy and other investment strategies;

(b) the Requested Relief will apply (i) only to short sales of Government Securities; and (ii) only as part of the Fund’s Interest Rate Risk Hedging Strategy;

(c) each Fund will otherwise comply with all of the requirements applicable to alternative mutual funds in subsections 2.6.1 and 2.6.2 of NI 81-102, subject to any relief granted therefrom by the securities regulatory authorities;

(d) a Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives used for purposes other than hedging will not exceed the Aggregate Exposure Limit; and

(e) each Fund’s prospectus will disclose that the Fund is able to short sell Government Securities (as defined above) in an amount up to 300% of the Fund’s NAV, including the material terms of this decision.

“Darren McKall”

Darren McKall, Manager Investment Management Division

Ontario Securities Commission

Application # 2025/0235

SEDAR+ Project #: 6270807

SCHEDULE A EXISTING FUNDS

Fund

Picton Mahoney Fortified Investment Grade Alternative Fund

Picton Mahoney Fortified Income Alternative Fund

Picton Mahoney Fortified Special Situations Alternative Fund

Picton Mahoney Fortified Multi-Strategy Alternative Fund

Picton Mahoney Fortified Alpha Alternative Fund