Mutual fund in Ontario (non-reporting issuer) exempt from naming the issuer of certain short positions in its portfolio -- must provide alternative portfolio disclosure.
National Instrument 81-106 Investment Fund Continuous Disclosure, ss. 3.5(1), 17.1.
March 6, 2007
IN THE MATTER OF
NATIONAL INSTRUMENT 81-106
INVESTMENT FUND CONTINUOUS DISCLOSURE
IN THE MATTER OF
ARROW HEDGE PARTNERS INC.
IN THE MATTER OF
ARROW CANADIAN INCOME FUND
ARROW CLOCKTOWER GLOBAL FUND
ARROW DISTRESSED SECURITIES FUND
ARROW ELKHORN US LONG/SHORT FUND
ARROW ELMWOOD FUND
ARROW EPIC CAPITAL FUND
ARROW GOODWOOD FUND
ARROW HIGH YIELD FUND
ARROW RISK ARBITRAGE FUND
ARROW WF ASIA FUND
(each a Fund, and collectively the Funds)
The Ontario Securities Commission (OSC) received an application from the Applicant for a decision pursuant to section 17.1 of National Instrument 81-106 Investment Fund Continuous Disclosure (NI 81-106) exempting each Fund and any future mutual funds managed by the Applicant which are not reporting issuers (collectively with the Funds, the Arrow Funds) from the requirement in paragraph 3.5(1)1 of NI 81-106 to include in the statements of investment portfolio prepared for the Arrow Funds the name of the issuer of the securities sold short by the Arrow Funds (the Statement of Investment Portfolio Requirement).
This Order is based on the following facts represented by the Applicant:
1. The Applicant is a corporation incorporated under the laws of Ontario. The Applicant is the manager of each of the Funds and will be the manager of any future Arrow Funds.
2. The Funds are open-end mutual fund trusts created under the laws of Ontario. Each of the Funds is governed by a trust indenture, as amended and restated from time to time, between the Applicant as manager and the Applicant as trustee.
3. The Funds are not reporting issuers.
4. Each of the Funds is an "investment fund" as that term is defined in NI 81-106 and is subject to the financial disclosure requirements therein.
5. The investment portfolio of each of the Funds is managed by an investment advisor retained by the Applicant (in each case, the "Investment Advisor").
6. As part of its investment strategy, each Fund makes extensive use of a short selling strategy pursuant to which securities believed to be overvalued and/or have deteriorating fundamentals such as decreasing market share, sales or earnings or other negative factors are sold short. The long and short positions of a Fund are managed according to the investment objectives and strategies of the particular Fund, and its Investment Advisor's view of the domestic and international economy and market trends in order to seek to optimize absolute returns. The allocation of long and short positions will vary. Short positions, on average, generally comprise around 30% of a Fund's portfolio of assets and occasionally can comprise up to 60%.
7. As at January 31, 2007, the Funds had an aggregate of 6,729 unitholders with $441 million of assets.
8. Each of the Funds employs a "buy and hold" strategy with respect to its investments, meaning they don't trade in and out of positions at a high rate. Because of this strategy, short positions disclosed in the statement of portfolio assets often remain open when the financial statements are distributed notwithstanding the 90 and 60 day delays in distribution of the annual and interim financial statements. Expressed as a percentage of the positions which were held on the date of the statements, the number of positions across all of the Funds which remained opened at the time of distribution of the December 31, 2005 audited annual statements was 57% and at the time of the June 30, 2006 interim statements it was 60%.
9. The Applicant is concerned that the Statement of Investment Portfolio Requirement could cause harm to the Funds because publishing information on short positions increases the risk of predatory marketing practices, such as short squeeze initiating trades, which could cause losses to the Funds. This is especially a concern for the Funds given their size and the number of their unitholders and the buy and hold element of the Funds' short selling strategy. Once a short squeeze has been initiated, the Investment Advisor of a Fund has limited options for protecting the Funds from harm and the Applicant believes that relief from the Statement of Investment Portfolio Requirement as requested is the best option to protect the Funds from harm.
The Director is satisfied that it would not be prejudicial to the public interest to grant the requested relief and orders that the Arrow Funds are exempt from the Statement of Investment Portfolio Requirement provided that for each Arrow Fund:
(i) the statement of investment portfolio discloses short positions by industry;
(ii) the statement of investment portfolio shows the average cost and market value of each industry category;
(iii) the statement of investment portfolio shows the percentage of net assets represented by short positions for each industry category;
(iv) the name of the issuer is disclosed for short positions that exceed 5% of an Arrow Fund's net assets;
(v) the offering documents for the Arrow Funds disclose the particulars of this exemption; and
(vi) this order terminates upon the coming into force of any legislation or rule of the OSC dealing with paragraph 3.5(1)1 of NI 81-106 or any matters relating to the disclosure of short positions by investment funds.