AGF Investments Inc.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- filer seeking relief from NI 81-102 to permit alternative mutual funds to physically short sell up to 100% of net assets -- funds could achieve similar short exposure through derivatives under NI 81-102 -- physical short selling is generally cheaper and more efficient and will increase risk to the funds compared to similar short exposure through derivatives -- relief subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.6.1(1)(c)(v), 2.6.2 (1), and 19.1(2).
December 9, 2019
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 AGF INVESTMENTS INC. (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of AGFiQ U.S. Long/Short Dividend Income CAD-Hedged Fund, AGFiQ U.S. Long/Short Dividend Income CAD-Hedged ETF and AGFiQ U.S. Market Neutral Anti-Beta CAD-Hedged ETF (the Initial Funds), each being a mutual fund or exchange-traded mutual fund that is structured as an "alternative mutual fund" within the meaning of National Instrument 81-102 Investment Funds (NI 81-102), and such alternative mutual funds as may be established in the future and for which the Filer or an affiliate of the Filer acts as investment fund manager (the Future Funds and together with the Initial Funds, the Funds, and each a Fund), for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), pursuant to section 19.1 of NI 81-102 exempting the Funds from subsections 2.6.1(1)(c)(v) and 2.6.2 of NI 81-102, to permit each Fund to borrow securities from a borrowing agent to sell securities short whereby (i) the aggregate market value of all securities sold short by a Fund may exceed 50% of the net asset value of the Fund and (ii) the aggregate value of cash borrowed combined with the aggregate market value of all securities sold short by each Fund may exceed 50% of the net asset value of the Fund (the Requested Relief).
Under the 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 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 (the Other Jurisdictions).
Interpretation
Terms defined in National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
Background
1. The Filer is a corporation existing under the laws of the Province of Ontario.
2. The Filer's head office is located in Toronto, Ontario.
3. The Filer is registered in the categories of (a) exempt market dealer in the Provinces of Alberta, British Columbia, Manitoba, Ontario, Quebec and Saskatchewan, (b) portfolio manager in each of the provinces and territories of Canada, (c) investment fund manager in the Provinces of Alberta, British Columbia, Newfoundland and Labrador, Ontario and Quebec, (d) a mutual fund dealer in the Provinces of British Columbia, Ontario and Quebec and (e) a commodity trading manager in the Province of Ontario.
4. Each Initial Fund is, and any Future Fund will be, a mutual fund created under the laws of the Province of Ontario and are governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities. Each Fund is or will be an alternative mutual fund for purposes of NI 81-102.
5. Units of the Funds will be offered by simplified prospectus, annual information form and fund facts prepared in accordance with NI 81-101 (a Simplified Prospectus), or by a long form and ETF Facts prospectus (Long Form Prospectus) prepared in accordance with National Instrument 41-101 -- General Prospectus Requirements (NI 41-101) as applicable, filed in all of the Jurisdictions and each Fund will be a reporting issuer in each of the Jurisdictions
6. Units of AGFiQ U.S. Long/Short Dividend Income CAD-Hedged Fund are being offered by Simplified Prospectus prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and will be a reporting issuer in each of the Jurisdictions.
7. Units of AGFiQ U.S. Long/Short Dividend Income CAD-Hedged ETF and AGFiQ U.S. Market Neutral Anti-Beta CAD-Hedged ETF are being offered by Long Form Prospectus prepared in accordance with NI 41-101 and will be a reporting issuer in each of the Jurisdictions.
8. The investment objective of each of AGFiQ U.S. Long/Short Dividend Income CAD-Hedged Fund and AGFiQ U.S. Long/Short Dividend Income CAD-Hedged ETF is to seek performance results that correspond to the price and yield performance, before fees and expenses, of the Indxx Hedged Dividend Income Currency-Hedged CAD Index.
9. The Indxx Hedged Dividend Income Index is a long/short index in which the long positions, in the aggregate, have approximately twice the weight as the short positions, in the aggregate. The Indxx Hedged Dividend Income Index identifies approximately 100 securities as equal-weighted long components and approximately 150-200 securities as equal-weighted short components. Thus, although all long positions are the same weight as each other and all short positions are the same weight as each other, in the aggregate the long positions outweigh the short positions.
10. The investment objective of AGFiQ U.S. Market Neutral Anti-Beta CAD-Hedged ETF is to seek performance results that correspond to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index (CAD-Hedged).
11. The Dow Jones U.S. Thematic Market Neutral Anti-Beta Index is a long/short market neutral index that is dollar-neutral. As such, it identifies long and short securities positions of approximately equal dollar amounts. The performance of the AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF will depend on the difference in the rates of return between its long positions and short positions. The universe of the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index is comprised of the top 1,000 eligible securities by market capitalization. The Dow Jones U.S. Thematic Market Neutral Anti-Beta Index identifies approximately the 20% of securities with the lowest betas within each sector as equal-weighted long positions and approximately the 20% of securities with the highest betas within each sector as equal-weighted short positions.
12. The goal of market neutral investing is to generate returns that are independent of the returns and direction of the stock market (called beta). Market neutral investing is often implemented through a long/short portfolio of investments in publicly traded stocks. The market exposures of the combined long and short positions are designed to cancel each other out, producing a net effect on portfolio returns from stock market returns close to zero. Market neutral investing is sometimes called an "absolute return" strategy because it seeks positive returns, whether the stock market goes up or down.
13. The proposed investment objective for each Future Fund will differ, but in each case, a core investment strategy as stated in the Simplified Prospectus or Long Form Prospectus, as applicable, will make the extensive use of short selling an investment strategy that is available to the portfolio manager in order to achieve the investment objectives of the applicable Fund and the portfolio manager's desired combination of long and short positions.
14. The investment strategies of each Fund will permit the Fund to borrow cash, enter into specified derivative transactions and/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 all securities sold short by the Fund and the aggregate notional amount of the Fund's specified derivatives positions (other than positions held for hedging purposes, as defined in NI 81-102) would not exceed 300% of the Fund's NAV (the Leverage Limit). If the Leverage Limit is exceeded, the Fund shall, as quickly as 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 aggregate notional amount of the Fund's specified derivatives position to be within the Leverage Limit, in compliance with section 2.9.1 of NI 81-102.
15. The Requested Relief would provide the portfolio manager of the Funds with the necessary flexibility to make timely trading decisions between physical short and synthetic short positions based on what is in the best interest of the Funds. The portfolio manager of the Funds, as a registrant and a fiduciary, is in the best position to determine whether the Funds should enter into a physical short position or a synthetic short position, depending on the surrounding circumstances. Accordingly, the Requested Relief would permit the Funds to engage in the most effective portfolio management available for the benefit of its unitholders.
16. Any short sales by a Fund will be consistent with the investment objectives and strategies of that Fund.
17. The Filer will determine each Fund's risk rating using the CSA's Mutual Fund Risk Classification Methodology For Use In Fund Facts and ETF Facts, as applicable, as set out in Appendix F of NI 81-102 (the Risk Methodology).
18. The investment strategies of each Fund will be amended to clearly disclose the short selling strategies of the Fund which are outside the scope of NI 81-102, including specifically that the aggregate market value of all securities sold short by the Fund may exceed 50% of the net asset value of the Fund, including how such strategies may affect investors' risk of losing money on their investment in the Fund.
19. The investment strategies of each Fund permit it to sell securities short, provided that at the time the Fund sells a security short (a) 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 net asset value of the Fund, and (b) the aggregate market value of all securities sold short by the Fund does not exceed 100% of its net asset value.
20. The Requested Relief would allow the Funds to fully hedge out their long positions through equivalent short positions in order to achieve its investment objectives, without the need to use, or incur the risks that may be associated with, specified derivatives.
21. Each Fund 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 will otherwise be made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transaction;
(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 each Fund will keep proper books and records of short sales and all of its assets deposited with borrowing agents as security.
22. The Filer believes that it is in the best interests of the Funds to be permitted to sell securities short in excess of the current limits permitted by NI 81-102.
Decision
The decision of the principal regulator under the Legislation is that the Requested Relief is granted provided that:
1. A Fund may sell a security short or borrow cash only if, immediately after the transaction:
a. The aggregate market value of all securities sold short by the Fund does not exceed 100% of the Fund's NAV;
b. The aggregate value of cash borrowing by the Fund does not exceed 50% of the Fund's NAV; and
c. The aggregate market value of securities sold short by the Fund combined with the aggregate value of cash borrowing by the Fund does not exceed 100% of the Fund's NAV.
2. Each short sale by a Fund will otherwise comply with all of the short sale requirements applicable to alternative mutual funds under section 2.6.1 and 2.6.2 of NI 81-102.
3. A Fund's aggregate exposure to short selling, cash borrowing and specified derivatives will not exceed the Leverage Limit.
4. Any short sales by a Fund will be consistent with the investment objectives and strategies of that Fund.
5. Each Fund's Simplified Prospectus or Long Form Prospectus, as applicable, will disclose that the Fund can sell securities short in an amount up to 100% of the Fund's NAV, including the material terms of this decision.