Hillsdale Canadian Long/Short Equity Fund et al. - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Relief from certain mutual fund conflict of interest investment restrictions to permit a mutual fund to invest in securities of a related party.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(a), 111(3), 113.

November 28, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA AND ONTARIO

(THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

HILLSDALE CANADIAN LONG/SHORT EQUITY FUND

HILLSDALE CANADIAN MARKET NEUTRAL EQUITY FUND

HILLSDALE US LONG/SHORT EQUITY FUND

HILLSDALE US PERFORMANCE EQUITY FUND

HILLSDALE CANADIAN PERFORMANCE EQUITY FUND

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in the Jurisdictions has received an application from the Hillsdale Canadian Long/Short Equity Fund, Hillsdale Canadian Market Neutral Equity Fund, Hillsdale US Long/Short Equity Fund, Hillsdale US Performance Equity Fund, Hillsdale Canadian Performance Equity Fund and any other fund that may be created and managed by the Manager in the future (collectively, the "Funds") for a decision under the securities legislation of the Jurisdictions (the "Legislation") for an exemption from the restrictions contained in the Legislation:

1. which prohibit a mutual fund from knowingly making or holding an investment in: (i) a person or company in which the mutual fund, alone or together with one or more related mutual funds, is a substantial securityholder; and (ii) an issuer in which a significant interest is held by an officer or director of the mutual fund, its management company or distribution company (or an associate of any one of them) or any person or company who is a substantial security holder of the mutual fund, its management company or its distribution company;

(collectively, the "Requested Relief").

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by Hillsdale Investment Management Inc. (the "Manager") on behalf of the Funds:

Manager

1. The Manager is a corporation incorporated under the Business Corporations Act (Ontario) with its head office in Toronto, Ontario.

2. The Manager is registered with the Ontario Securities Commission ("Commission") under the Ontario Act as an adviser in the categories of investment counsel and portfolio manager and as a dealer in the category of limited market dealer.

3. The Manager acts as trustee and portfolio manager of the Funds and is responsible for carrying on the business and affairs of the Funds under the terms of an amended and restated declaration of trust dated September 1, 2006 (for Hillsdale US Performance Equity Fund and Hillsdale Canadian Performance Equity Fund) and an amended and restated trust agreement dated September 1, 2006 (for Hillsdale Canadian Long/Short Equity Fund, Hillsdale Canadian Market Neutral Equity Fund and Hillsdale US Long/Short Equity Fund).

Funds

4. The Funds are open-end investment trusts established by the Manager under the laws of the Province of Ontario. The date of establishment of each Fund is as follows:

Hillsdale Canadian Long/Short Equity Fund	January 31, 2000
Hillsdale US Long/Short Equity Fund	July 31, 2000
Hillsdale Canadian Market Neutral Equity Fund	July 31, 2001
Hillsdale Canadian Performance Equity Fund	May 9, 2003
Hillsdale US Performance Equity Fund	November 2, 2005

The head office of the Funds is in Toronto, Ontario.

5. The Funds are distributed under the terms and provisions of an offering memorandum in Canada's private placement markets pursuant to available prospectus exemptions and otherwise in accordance with National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"). The Funds are not a reporting issuer in any Jurisdiction and they are not in default under relevant securities legislation of the Jurisdictions.

6. The investment objective of each Fund is as follows:

Hillsdale Canadian Long/Short Equity Fund -- to provide investors with a rate of return on capital in excess of Canadian equities over a three-year period with a low correlation to, and volatility equal to or less than, the S&P/TSX Composite Index.

Hillsdale Canadian Market Neutral Equity Fund -- to provide investors with a non-correlated rate of return on capital in excess of Canadian T-bills over a three-year period with volatility equal to or less than that of long-term bonds.

Hillsdale US Long/Short Equity Fund - to provide investors with a rate of return on capital in excess of U.S. equities over a three-year period with a low correlation to, and volatility equal to or less than, the S&P 500 Composite Index.

Hillsdale US Performance Equity Fund -- to provide investors with a rate of return on capital in excess of, and with volatility equal to or less than, the Russell 2000 Total Return Index.

Hillsdale Canadian Performance Equity Fund -- to provide investors with a rate of return on capital in excess of, and with volatility equal to or less than, the S&P/TSX SmallCap Index.

7. Each Fund uses a proprietary, dynamic, multi-factor ranking approach to stock selection and for the control of risk in the portfolio as part of their investment strategy. Inputs are largely fundamental, expectational and technical and are collected from many different source databases. Securities are reviewed weekly for their adherence to specific decision rules and for their contribution to increasing return and/or reducing risk. Stocks with a law marginal contribution to risk-adjusted return are sold and replaced with stocks with the highest contribution then available.

8. Each Fund (collectively referred to in this context as the "Top Funds"), would like the ability to invest in securities of any another Fund (collectively referred to in this context as the "Underlying Funds"), in accordance with the Top Fund's investment objective.

9. The Manager believes that a Top Fund's investment (the "Fund-on-Fund Investments") in securities of an Underlying Fund (which, in turn, has acquired or will acquire particular asset classes or pursue particular investment strategies that are in accordance with that Top Fund's investment objective) provides an efficient and cost-effective manner of pursuing portfolio diversification opportunities on behalf of the Top Fund rather than through the direct purchase of securities.

10. In connection with the Fund-on-Fund Investments, the Manager shall ensure that:

a) the arrangements between or in respect of the Top Funds and the Underlying Fund are such as to avoid the duplication of management fees or incentive fees;

b) the offering memorandum will describe the Top Fund's ability to invest a portion of its assets in securities of the Underlying Funds and that the Underlying Funds are managed by the Manager;

c) no sales or redemption fees are payable to the Top Funds in relation to its purchases or redemptions of securities of the Underlying Funds;

d) the Manager will not vote the securities of the Underlying Fund held by the Top Funds at any meeting of holders of such securities; and

e) the offering memorandum of the Top Fund will contain information about how the Top Fund investor may obtain a copy of the Underlying Fund offering memorandum or its annual or semi-annual financial statements.

11. In the absence of the Requested Relief, the Top Fund would be precluded from implementing the Fund-on-Fund Investments due to the investment restrictions contained in the Legislation.

12. The Fund-on-Fund Investments represents the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Top Fund.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that:

a) securities of each Fund are distributed only on a private placement basis pursuant to available prospectus exemptions;

b) the arrangements between or in respect of the Top Funds and the Underlying Fund are such as to avoid the duplication of management fees or incentive fees;

c) the offering memorandum will describe the Top Fund's ability to invest a portion of its assets in securities of the Underlying Funds and that the Underlying Funds are managed by the Manager;

d) no sales or redemption fees are payable to the Top Funds in relation to its purchases or redemptions of securities of the Underlying Funds;

e) the Manager will not vote the securities of the Underlying Fund held by the Top Funds at any meeting of holders of such securities; and

f) the offering memorandum of the Top Fund will contain information about how the Top Fund investor may, on request, obtain a copy of the Underlying Fund offering memorandum or its annual or semi-annual financial statements, which will be sent to them free of charge.