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 FORGE FIRST ASSET MANAGEMENT INC. (the Filer)
July 10, 2025
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Forge First Enhanced Multi Asset Alternative Fund, a new alternative mutual fund to be created by the Filer (the Proposed Alternative Fund), and any other alternative mutual funds, including exchange-traded funds, currently or in the future managed by the Filer, or an affiliate of, or successor to, the Filer (collectively with the Proposed Alternative Fund, the Alternative Funds and each, an Alternative Fund), each of which is, or will be, an alternative mutual fund subject to National Instrument 81-102 Investment Funds (NI 81-102), for a decision under the securities legislation (the Legislation) of the Jurisdiction exempting each of the Alternative Funds from:
(i) the following restrictions in NI 81-102, to permit each Alternative Fund to sell securities short and/or borrow cash up to a combined aggregate total of 100% of the net asset value (NAV) of the Alternative Fund:
(a) subparagraph 2.6.1(1)(c)(v), which restricts an Alternative Fund from selling a security short if, at the time, the aggregate market value of all securities sold short by the Alternative Fund exceeds 50% of the Alternative Fund’s NAV (together with (i)(c) below, the Short Selling Limit);
(b) paragraph 2.6(2)(c), which restricts an Alternative Fund from borrowing cash if the value of cash borrowed, when aggregated with the value of all outstanding borrowing by the Alternative Fund, exceeds 50% of the Alternative Fund’s NAV (together with (i)(c) below, the Cash Borrowing Limit); and
(c) section 2.6.2, which restricts an Alternative Fund from borrowing cash or selling 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 all securities sold short by the Alternative Fund (the Combined Aggregate Value) would exceed 50% of the Alternative Fund’s NAV and which requires an Alternative Fund, if the Combined Aggregate Value exceeds 50% of the Alternative Fund’s NAV, as quickly as commercially reasonable, to take all necessary steps to reduce the Combined Aggregate Value to 50% or less of the Alternative Fund’s NAV; and
(ii) the restriction in subparagraph 2.6.1(1)(c)(iv) of NI 81-102, which restricts an Alternative Fund from selling a security of an issuer, other than a “government security” (as defined in NI 81-102) short if, at the time, the aggregate market value of the securities of that issuer sold short by the Alternative Fund exceeds 10% of the Alternative Fund’s NAV (the Single Issuer Short Restriction) in order to permit each Alternative Fund to exceed the Single Issuer Short Restriction to short sell index participation units (IPUs, and each, an IPU) of one or more issuers of IPUs (IPU Issuers) up to a maximum of 100% of an Alternative Fund’s NAV at the time of the sale
((i)(a) and (i)(c) together, the Short Selling Relief, (i)(b) and (i)(c) together, the Cash Borrowing Relief, (ii) the Single Issuer Short Relief and, collectively with the Short Selling Relief and the Cash Borrowing Relief, the Exemption Sought).
Under National Policy 11‑203 Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(i) the Ontario Securities Commission is the principal regulator for this application; and
(ii) the Filer has provided notice that paragraph 4.7(1)(c) 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 (the Other Jurisdictions and, together with the Jurisdiction, the Jurisdictions).
Interpretation
Unless expressly defined herein, terms in this decision have the respective meanings given to them in MI 11-102, National Instrument 14-101 Definitions and NI 81-102. In addition to the defined terms used in this decision, capitalized terms used in this decision have the following meanings:
Aggregate Limit means the aggregate gross exposure restriction in section 2.9.1 of NI 81-102, which places an overall limit on an alternative mutual fund’s exposure to cash borrowing, short selling and specified derivatives equal to 300% of such fund’s NAV.
IPU means “index participation unit”, as defined in NI 81-102.
IPU Issuer means an investment fund the securities of which are IPUs.
Prospectus means the simplified prospectus of an Alternative Fund prepared in accordance with Form 81-101F1 Contents of Simplified Prospectus or the prospectus of an Alternative Fund prepared in accordance with Form 41-101F2 Information Required in an Investment Fund Prospectus, as each may be amended from time to time.
Total Borrowing and Short Selling Limit means 100% of an Alternative Fund’s NAV.
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 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, as a portfolio manager in Ontario and as an exempt market dealer in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, and Newfoundland and Labrador.
The Filer acts, and may in the future act, as investment fund manager and portfolio manager in respect of the Alternative Funds.
The Filer is not in default of applicable securities legislation in any of the Jurisdictions.
The Alternative Funds
Each Alternative Fund is, or will be, an investment fund organized and governed by the laws of a province or territory of Canada or the laws of Canada.
Each Alternative Fund is, or will be, an alternative mutual fund governed by NI 81-102, subject to any exemptions therefrom granted by the applicable securities regulatory authorities.
Securities of the Alternative Funds are, or will be, qualified for distribution to investors in one or more of the Jurisdictions pursuant to a Prospectus prepared and filed in accordance with the securities legislation of each of the applicable Jurisdictions.
The existing Alternative Funds are not in default of applicable securities legislation in any of the Jurisdictions.
IPU Issuers
The portfolio holdings of IPU Issuers are generally diversified.
IPU Issuers seek to provide investment results that correspond generally to the performance of a specified widely quoted market index comprised of multiple issuers by holding a portfolio of securities that are included in the index or otherwise investing in a manner that causes the IPU Issuer to replicate the performance of that index.
The portfolio holdings of IPU Issuers are generally liquid.
The creation process for IPUs can quickly increase the available supply of IPUs in the marketplace, making the potential for a liquidity issue inherently lower.
The weight of each underlying security held in the portfolio of an IPU Issuer substantially corresponds to the weight of such security in the underlying index.
Short Selling Relief and Cash Borrowing Relief
The investment objective of each Alternative Fund will differ but, in each case, key investment strategies utilized by an Alternative Fund may include (a) the use of market-neutral, offsetting, inverse, or shorting strategies requiring the use of short selling in excess of the Short Selling Limit and/or (b) the use of cash borrowing to provide additional investment exposure in excess of the Cash Borrowing Limit.
The Alternative Funds will generally seek to generate an attractive risk/return profile independent of the direction of the broad markets. As such, the Alternative Funds will use market-neutral strategies to seek to hedge out an Alternative Fund’s exposure to the direction of broad markets, and to generate positive performance from the difference (i.e. spread) between the performance of the portfolio’s long and short positions.
Market-neutral strategies are well-recognized for limiting market risk, and 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.
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 as a source of returns with an offsetting long position or positions.
The Alternative Funds may use cash borrowing as a more flexible and cost-efficient means of providing additional leverage for investment strategies such as merger arbitrage strategies where the use of derivative instruments to provide the same level of exposure may not be practical.
In connection with merger arbitrage strategies, the portfolio manager is typically required to respond in a timely manner to public disclosure relating to a transaction and market movements in the share price of the target and/or acquiror company. The use of cash borrowing in such circumstances provides an easily accessible tool that enables the portfolio manager to implement the investment decision more quickly compared to the use of derivative instruments that provide the same level of exposure on a synthetic basis.
The costs to the Alternative Funds of engaging in physical short sales and cash borrowing are typically less when compared to the equivalent derivative transactions due to a number of factors which may include:
(a) prime brokers typically have greater flexibility to offer more favourable financing terms to an Alternative Fund in relation to the aggregate amount of the Alternative Fund’s assets held in the prime brokerage margin account in relation to short sales and cash borrowing;
(b) margin requirements for derivative instruments are primarily based on the underlying investment exposure and, as a result, can be high; and
(c) certain derivative instruments (such as futures contracts) require cash or near cash securities (such as government treasuries) to be deposited with the counterparty as collateral. This would require an Alternative Fund to use these portfolio assets to satisfy collateral requirements rather than utilizing them in connection with the Alternative Fund’s investment strategies.
Single Issuer Short Relief
Subsection 2.1(1.1) of NI 81-102 restricts an alternative mutual fund from purchasing a security of an issuer, entering into a specified derivatives transaction or purchasing an IPU if, immediately after the transaction, more than 20% of its NAV would be invested in securities of any one issuer (the Concentration Restriction).
A significant risk associated with short positions generally is the potential to be unable to obtain the securities required to cover the short position, or to be unable to obtain them without additional costs, at the required time due to a lack of liquidity in the market. The liquidity of the IPU Issuers significantly reduces the risk that an Alternative Fund may not be able to cover or exit a short position in an IPU Issuer.
The Single Issuer Short Relief would permit the Alternative Funds to benefit from efficiencies without prejudicing investors:
(a) IPU Issuers seek to provide investment results that correspond generally to the performance of a specified widely quoted market index comprised of multiple issuers by holding a portfolio of securities that are included in the index or otherwise investing in a manner that causes the IPU Issuer to replicate the performance of that index. Accordingly, the portfolio holdings of IPU Issuers are generally diversified;
(b) the creation process for IPUs of IPU Issuers can quickly increase the available supply of IPUs of IPU Issuers in the marketplace, making the potential for a liquidity issue inherently lower;
(c) the portfolio holdings of IPU Issuers are generally liquid, which also makes the potential for a liquidity issue inherently lower; and
(d) the weight of each underlying security held in the portfolio of an IPU Issuer substantially corresponds to the weight of such security in the underlying index.
The Single Issuer Short Relief would permit each Alternative Fund to short sell IPUs of IPU Issuers, without otherwise impacting such Alternative Fund’s ability to borrow cash or engage in short sales under NI 81-102, in circumstances where the portfolio manager believes that it is more beneficial to gain the desired short exposure to IPU Issuers (a) through shorting fewer IPU Issuers than would otherwise be necessary under the Single Issuer Short Restriction and (b) by way of short sales rather than by way of specified derivative transactions.
The Filer is of the view that it would be in each Alternative Fund’s best interest to be able to physically short sell IPUs of IPU Issuers, up to 100% of the Alternative Fund’s NAV at the time of sale, instead of being limited to achieving that degree of leverage through either specified derivatives alone, or a combination of physical short selling and specified derivatives, including for the following reasons:
(a) in some circumstances, the availability of derivatives with similar risk characteristics to corresponding indices may be limited. Alternatively, pricing of a short position at a particular point in time may be preferable to the pricing of a corresponding derivatives contract;
(b) granting the Single Issuer Short Relief would expand the scope of available tools at the disposal of the portfolio manager to achieve market hedging, and thereby provide the Alternative Fund with the best execution and best liquidity; and
(c) the Single Issuer Short Relief is less risky than certain derivatives transactions by allowing the Alternative Fund to, in part, mitigate against settlement risk (which is the risk that one of the parties to the derivatives contract defaults under the derivatives contract). Use of derivatives may also be incrementally riskier by exposing the Alternative Fund to operational risk (such as the case of a party to a derivatives contract failing to maintain adequate internal procedures or controls including intra-day settlements or managing closing-out the transaction) and liquidity risk.
- The Single Issuer Short Relief would allow the portfolio manager greater flexibility and liquidity in pursuing a hedging strategy that reduces potential market volatility by expanding options for hedging to include selling highly liquid IPU Issuers short.
General
- The investment strategies of each Alternative Fund permit, or will permit, it to:
(a) sell securities short, provided that, at the time the Alternative Fund sells a security short (i) the aggregate market value of securities of any one issuer (other than “government securities” and IPU Issuers) sold short by the Alternative Fund does not exceed 10% of the Alternative Fund’s NAV and (ii) the aggregate market value of all securities sold short by the Alternative Fund does not exceed 100% of its NAV;
(b) borrow cash, provided that, at the time, the value of cash borrowed when aggregated with the value of all outstanding borrowing by the Alternative Fund does not exceed 100% of the Alternative Fund’s NAV;
(c) borrow cash or sell securities short, provided that the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the Alternative Fund does not exceed the Total Borrowing and Short Selling Limit. If the Total Borrowing and Short Selling Limit is exceeded, the Alternative 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; and
(d) borrow cash, sell securities short, or enter into specified derivatives transactions, provided that, immediately after entering into a cash borrowing, short selling, or specified derivative transaction, the aggregate value of cash borrowed combined with the aggregate market value of securities sold short and aggregate notional amount of the Alternative Fund’s specified derivatives positions (other than positions held for hedging purposes, as defined in NI 81-102) would not exceed the Aggregate Limit. If the Aggregate Limit is exceeded, the Alternative 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 and the aggregate notional amount of the Alternative Fund’s specified derivatives positions (other than positions held for hedging purposes) to be within the Aggregate Limit.
Notwithstanding the Exemption Sought, the Alternative Funds would otherwise still be required to comply with all of the requirements applicable to alternative mutual funds in sections 2.6.1 and 2.6.2 of NI 81-102, subject to any relief granted therefrom by the securities regulatory authorities.
The Exemption Sought would not change an Alternative Fund’s obligation to comply with the Aggregate Limit. The Aggregate Limit would continue to apply to an Alternative Fund’s combined exposure to borrowing, short selling and derivatives. A decision to grant the Exemption Sought would not permit an Alternative Fund to exceed the Aggregate Limit through a combination of investment strategies.
If an Alternative Fund’s aggregate gross exposure were to exceed the Aggregate Limit, subsection 2.9.1(5) of NI 81-102 would require the Alternative Fund to, as quickly as commercially reasonable, take all necessary steps to reduce the aggregate gross exposure to 300% of the Alternative Fund’s NAV or less.
Each Alternative Fund will implement the following controls when conducting a short sale:
(a) the Alternative Fund will assume the obligation to return to the borrowing agent the securities borrowed to effect the short sale;
(b) the Alternative 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 portfolio manager will monitor the short positions within the constraints of the Exemption Sought as least as frequently as daily;
(d) the security interest provided by the Alternative Fund over any of its assets that is required to enable the Alternative Fund to effect a short sale transaction is made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transactions; and
(e) the portfolio manager 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.
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:
In Respect of the Short Selling Relief and the Cash Borrowing Relief:
- An Alternative Fund may sell a security short or borrow cash only if, immediately after the cash borrowing or short selling transaction:
(a) the aggregate market value of securities of any one issuer (other than “government securities” as defined in NI 81-102 and IPU Issuers) sold short by the Alternative Fund does not exceed 10% of the Alternative Fund’s NAV;
(b) the aggregate market value of all securities sold short by the Alternative Fund does not exceed 100% of the Alternative Fund’s NAV;
(c) the value of cash borrowed when aggregated with the value of all outstanding borrowing by the Alternative Fund does not exceed 100% of the Alternative Fund’s NAV;
(d) the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the Alternative Fund does not exceed the Total Borrowing and Short Selling Limit; and
(e) the Alternative Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives will not exceed the Aggregate Limit.
- In the case of a short sale, the short sale:
(a) otherwise complies with all of the short sale requirements applicable to alternative mutual funds under sections 2.6.1 and 2.6.2 of NI 81-102; and
(b) is consistent with the Alternative Fund’s investment objective and strategies.
- In the case of a cash borrowing transaction, the transaction:
(a) otherwise complies with all of the cash borrowing requirements applicable to alternative mutual funds under sections 2.6 and 2.6.2 of NI 81-102; and
(b) is consistent with the Alternative Fund’s investment objective and strategies.
- The Prospectus under which securities of the Alternative Fund are offered discloses, or will disclose at the time of its next renewal, as applicable, that the Alternative Fund can sell securities short or borrow cash up to, and subject to, the limits described in condition (1) above.
In Respect of the Single Issuer Short Relief:
The only securities that an Alternative Fund will sell short (other than “government securities”, as defined in NI 81-102), resulting in the aggregate market value of the securities of that issuer sold short by the Alternative Fund exceeding 10% of the Alternative Fund’s NAV at the time of sale, will be IPUs.
Each Alternative Fund complies with the Single Issuer Short Restriction in respect of its exposure to the IPUs of an IPU Issuer that the Alternative Fund sells short, and for each IPU the Alternative Fund sells short, the Alternative Fund will be considered to be directly selling short its proportionate share of the securities held by the IPU Issuer, except that it will not be considered to be directly selling short a security or instrument that is a component of, but represents less than 10% of, the securities held by the IPU Issuer.
An Alternative Fund may sell an IPU short or borrow cash only if, immediately after the transaction (i) the aggregate market value of all securities sold short by the Alternative Fund does not exceed 100% of the Alternative Fund’s NAV and (ii) the aggregate market value of securities sold short by the Alternative Fund combined with the value of cash borrowed by the Alternative Fund does not exceed 100% of the Alternative Fund’s NAV.
Each Alternative Fund otherwise complies 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 this relief and any other relief granted therefrom by the securities regulatory authorities.
Each Alternative Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives will not exceed the Aggregate Limit.
Each short sale will be consistent with the Alternative Fund’s investment objectives and strategies.
The Prospectus under which securities of the Alternative Fund are offered discloses, or will disclose at the time of its next renewal, as applicable, that the Alternative Fund can sell IPUs of one or more IPU Issuers short in an amount up to 100% of the Alternative Fund’s NAV at the time of sale.
“Darren McKall”
Darren McKall
Associate Vice President, Investment Management Division
Ontario Securities Commission
Application No. 2025/0392
SEDAR+ No. 6302284