Securities Law & Instruments

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from conflict of interest provisions in s. 13.5 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Obligations to allow pooled funds to invest in securities of underlying funds with the same portfolio adviser without prior written consent of investors -- top feeder fund invests substantially all of its assets in one underlying master fund as part of a "clone" structure -- feeder fund is sole securityholder of underlying master fund -- underlying master fund then invests in other pooled funds -- relief subject to certain conditions

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 13.5(2)(a), 15.1.

April 26, 2013


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
EDGEHILL PARTNERS (the Filer)

AND

IN THE MATTER OF THE TOP FUNDS
(as defined below)

DECISION



Background

The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer, EdgeHill Multi Strategy Fund, Ltd. (the Initial Feeder Fund) and anyother investment fund which is not a reporting issuer under the Securities Act (Ontario) (the Act) established or managed by the Filer after the date hereof (collectively, the Future Feeder Funds and, together with the Initial Feeder Fund, the Feeder Funds), EdgeHill Multi Strategy Master Fund, Ltd. (the Initial Top Fund) and any other investment fund which is not a reporting issuer under the Act established, advised or managed by the Filer after the date hereof (theFuture Top Funds and, together with the Initial Top Fund, the Top Funds) for a decision under the securities legislation of Ontario (the Legislation), exempting the Filer with respect to each of the Top Funds that invests its assets in EdgeHill Quantitative Proprietary Strategies Master Fund, Ltd. (the Initial Underlying Master Fund) and any other investment fund which is not a reporting issuer under the Act established, advised or managed by the Filer after the date hereof (the Future Underlying Funds and, together with the Initial Underlying Master Fund, the Underlying Funds), from the restriction in sub-clause 13.5(2)(a)(ii) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) that prohibits a registered adviser from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase securities of an issuer in which a responsible person or an associate of the responsible person is a partner, officer or director unless the written consent of the client to the purchase is obtained before the purchase (the Requested Relief).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

1. the Ontario Securities Commission is the principal regulator for this application; and

2. 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 British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick and Newfoundland and Labrador.

Representations

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

1. The Filer is a general partnership formed under the laws of the Province of Ontario with its head office located in Toronto, Ontario.

2. The Filer is registered with the Ontario Securities Commission as an investment fund manager under the Act. It is also registered as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer under the Act and applicable securities legislation in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Newfoundland and Labrador.

3. The Filer is not a reporting issuer in any jurisdiction of Canada and is not in default of securities legislation of any jurisdiction of Canada.

The Initial Feeder Fund

4. The Initial Feeder Fund is a mutual fund for the purposes of the Act.

5. The Initial Feeder Fund is an exempted company incorporated with limited liability as an open-ended investment fund under the laws of the Cayman Islands.

6. The investment objective of the Initial Feeder Fund is to generate superior risk adjusted investment returns over the long term by providing investors with exposure to a multi-strategy approach consisting of diversified investments. The Initial Feeder Fund will also seek to preserve capital and mitigate risk through the application of both portfolio and risk management tools.

7. The Initial Feeder Fund seeks to achieve its investment objective by investing all or substantially all of its assets in securities of the Initial Top Fund.

8. The Filer does not act as the investment adviser to the Initial Feeder Fund but does provide certain investment fund management and certain dealer services to the Initial Feeder Fund.

9. The securities of the Initial Feeder Fund are sold to offshore investors on a private placement basis and to investors resident in the provinces of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Newfoundland and Labrador pursuant to available prospectus exemptions in accordance with National Instrument 45-106 -- Prospectus and Registration Exemptions (NI 45-106).

10. The Initial Feeder Fund is not a reporting issuer under the Act and is not in default of securities legislation of any jurisdiction of Canada. No Future Feeder Fund will be a reporting issuer under the Act.

11. All Future Feeder Funds will have a similar structure as the Initial Feeder Fund and each Future Feeder Fund will invest all or substantially all of its assets in a Top Fund.

The Top Funds

12. Each of the Top Funds is, or will be, a mutual fund for the purposes of the Act.

13. The Initial Top Fund is an exempted company incorporated with limited liability under the laws of the Cayman Islands.

14. Securities of the Initial Top Fund are not, and will not be, offered in Canada.

15. The Initial Top Fund's investment objective is to generate superior risk adjusted investment returns over the long term by utilizing a multi-strategy approach consisting of diversified investments. The Initial Top Fund will also seek to preserve capital and mitigate risk through the application of both portfolio and risk management tools.

16. In order to achieve its objective, the Initial Top Fund actively allocates and re-allocates capital over multiple investment strategies based upon the Filer's opinion of the position of the market cycle. The Filer believes that this approach will allow for timely capital allocation decisions on behalf of the Initial Top Fund.

17. Pursuant to an investment advisory and management agreement (the Top Fund Investment Management Agreement), the Filer is the manager and investment adviser of the Initial Top Fund and will be the manager and investment adviser of the Future Top Funds and is, or will be, responsible for managing the assets of the Top Funds and has, or will have, complete discretion to invest and reinvest the Top Funds' assets, and is, or will be, responsible for executing all portfolio transactions in respect of the Top Funds.

18. The Initial Top Fund is not a reporting issuer under the Act and is not in default of securities legislation of any jurisdiction of Canada. None of the Future Top Funds will be a reporting issuer under the Act.

19. The Initial Feeder Fund is the sole securityholder of the Initial Top Fund. Each Future Top Fund will also have a Feeder Fund as its sole securityholder.

The Underlying Funds

20. The Initial Underlying Master Fund will be an exempted company incorporated with limited liability under the laws of the Cayman Islands.

21. Securities of the Initial Underlying Master Fund will not be offered in Canada.

22. The investment objective of the Initial Underlying Master Fund is to generate superior risk-adjusted investment returns over the long term by utilizing a multi-strategy approach consisting of diversified quantitative and systematic investment strategies.

23. In order to achieve its objective, the Initial Underlying Master Fund will actively allocate capital over multiple investment strategies predominantly based upon researched, repeatable and process-driven methodologies. The Filer believes that this approach will allow for timely capital allocation decisions on behalf of the Initial Underlying Master Fund.

24. Each investment strategy and all future strategies employed by the Initial Underlying Master Fund will be operated with the objective of providing diverse sources of return. Each investment strategy will generally be supported by quantitative analysis, which may include macro-economic, fundamental and systematic analysis.

25. The Initial Underlying Master Fund will invest in a variety of securities including, but not limited to, equities, corporate bonds, high yield securities, convertible bonds, trust units, preferred shares, currencies, commodities, financial futures, warrants and options. The Initial Underlying Master Fund may also invest in other financial instruments that may be either listed on recognized stock exchanges or unlisted. The Initial Underlying Master Fund may employ leverage and short selling to enhance investment returns and use other financial instruments including cash, short positions, options, futures, swaps and other derivative instruments in order to enhance returns and/or mitigate risk to achieve an optimal risk/return profile.

26. Each of the Underlying Funds will be a mutual fund for the purposes of the Act.

27. The investments held by the Underlying Funds are considered to be liquid.

28. Each of the Underlying Funds will have separate investment objectives, strategies and/or restrictions.

29. Pursuant to an investment advisory and management agreement (the Underlying Master Fund Investment Management Agreement), the Filer will act as the manager and investment adviser of the Initial Underlying Master Fund and will be the manager and investment adviser of the Future Underlying Funds and will be responsible for managing the assets of the Underlying Funds and will have complete discretion to invest and reinvest the Underlying Funds' assets, and is, or will be, responsible for executing all portfolio transactions in respect of the Underlying Funds.

30. The Initial Underlying Master Fund will not be a reporting issuer under the Act. None of the Future Underlying Funds will be a reporting issuer under the Act.

Fund-on-Fund Structure

31. The Top Funds allow investors in the Feeder Funds to obtain exposure to the investment portfolios of the Underlying Funds and their respective investment strategies primarily through direct investments by the Top Funds in securities of the Underlying Funds (the Fund-on-Fund Structure).

32. Investing in the Underlying Funds will allow the Top Funds to achieve their investment objectives in a cost efficient manner and will not be detrimental to the interests of other securityholders of the Underlying Funds.

33. An investment by a Top Fund in an Underlying Fund can provide greater diversification for a Top Fund in particular asset classes on a basis which is not materially more expensive than investing directly in the securities held by the applicable Underlying Fund.

34. An investment by a Top Fund in an Underlying Fund is, or will be, compatible with the investment objectives of the Top Fund.

35. The Filer is entitled to receive monthly management fees, payable in arrears, and performance fees with respect to the Initial Top Fund and the Initial Underlying Master Fund.

36. The Filer will ensure that the arrangements between or in respect of a Feeder Fund, a Top Fund and an Underlying Fund in respect of an investment pursuant to the Fund-on-Fund Structure avoid the duplication of management fees and incentive fees. The Filer and its affiliates do not charge, and will not charge, any management fee or incentive fee to the Feeder Funds or Top Funds.

37. There will be no sales fees or redemption fees payable by a Feeder Fund or a Top Fund in respect of an acquisition, disposition or redemption of securities of an Underlying Fund by the Top Fund.

38. Prior to the time of purchase of securities of a Top Fund, an investor in a Feeder Fund will be provided with an offering memorandum of the Feeder Fund which contains disclosure about the relationships and potential conflicts of interest between the Feeder Fund, the Top Fund and the Underlying Funds.

39. The offering memorandum of each Feeder Fund will describe the Top Funds' intent, or ability, to invest in securities of the Underlying Funds and that the Underlying Funds are also managed and/or advised by the Filer.

40. The securityholders of a Feeder Fund will receive, on request, a copy of the offering memorandum or other similar document, if available, and the audited financial statements and interim financial statements of the Top Fund or Underlying Fund in which the Top Fund invests.

41. The Filer will not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of any Underlying Fund, unless the Top Fund is the sole owner of the securities of the Underlying Fund at the time of the meeting or the effective date of the resolution, in which case the Filer will arrange for all the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the applicable Feeder Fund.

42. Each of the Feeder Fund, the Top Fund and the Underlying Fund have matching valuation dates and are valued on a monthly basis.

43. Securities of each of the Feeder Fund, the Top Fund and the Underlying Fund can be redeemed on any valuation date.

44. No Underlying Fund will also be a Feeder Fund or Top Fund.

45. No Top Fund will invest more than 10% of its net assets in securities of a single Underlying Fund as measured at the time of purchase.

Generally

46. Since the Top Funds do not offer their securities under a simplified prospectus, they are not subject to National Instrument 81-102 and therefore the Top Funds are unable to rely upon the exemption codified under sub-section 2.5(7) of NI 81-102.

47. In the absence of the Requested Relief, each of the Top Funds would be precluded from investing in an Underlying Fund, unless the consent of each investor in the Top Fund is obtained, since the Filer or, an officer and/or director of the Filer (considered a responsible person within the meaning of the applicable provisions of NI 31-103) may also be an officer and/or director of, or may perform a similar function for or occupy a similar position with, the Underlying Fund.

48. The Fund-on-Fund Structure does not result in any material increase in fees or expenses to investors in the Feeder Funds and there are also no sales or redemption charges applicable to the transactions.

49. Investments in the Underlying Funds should not result in a decrease of diversification of investment exposure for investors in the Top Funds as the Underlying Funds will be appropriately diversified. Investing the assets of the Top Funds in the Underlying Funds will enable the Filer to achieve greater portfolio diversification in the assets of the Top Funds than investing directly in a portfolio of securities.

50. The Fund-on-Fund Structure permits the Top Funds and the Underlying Funds to rely on the favourable interpretive rules in section 115.2 of the Income Tax Act (Canada)

51. A Top Fund's investments in the Underlying Funds represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the investment funds concerned.

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 the Filer ensures that:

(a) securities of the Feeder Funds are distributed in Canada solely pursuant to exemptions from the prospectus requirements in NI 45-106;

(b) the investment by a Top Fund in an Underlying Fund is compatible with the fundamental objectives of the Top Fund;

(c) no management fees or incentive fees are payable by a Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Fund for the same service;

(d) no sales fees or redemption fees are payable by the Top Fund in relation to its purchases or redemptions of securities of an Underlying Fund other than brokerage fees incurred on the purchase or disposition of securities of an Underlying Fund that are purchased or disposed of in the secondary market;

(e) no Top Fund will invest in an Underlying Fund unless the Underlying Fund invests less than 10% of its net assets in mutual funds other than mutual funds that are "money market funds" (as defined by NI 81-102) or mutual funds that issue "index participation units" (as defined by NI 81-102);

(f) the Filer does not cause the securities of an Underlying Fund held by a Top Fund to be voted at any meeting of the securityholders of any Underlying Fund, unless the Top Fund is the sole owner of the securities of the Underlying Fund at the time of the meeting or the effective date of the resolution, in which case the Filer will arrange for all the securities the Top Fund holds of the Underlying Fund to be voted by the beneficial holders of securities of the applicable Feeder Fund;

(g) the Filer will provide to investors in a Feeder Fund the offering memorandum (or other similar document) of the Feeder Fund, which discloses:

(i) that the Top Fund may purchase units of the Underlying Funds;

(ii) the fact that the Underlying Funds are also managed and/or advised by the Filer;

(iii) the approximate percentage of net assets of the Top Fund that is intended to be invested in securities of the Underlying Fund; and

(iv) the process or criteria used to select the Underlying Fund;

(h) the Filer provides written disclosure in the next regular written communication made after the date of this decision to existing investors in the Initial Feeder Fund, of the following:

(i) that the Initial Top Fund may purchase shares of the Initial Underlying Feeder Fund;

(ii) the fact that the Underlying Funds are also managed and/or advised by the Filer;

(iii) the approximate percentage of net assets of the Initial Top Fund that is intended to be invested in securities of the Initial Underlying Feeder Fund; and

(iv) the process or criteria used to select the Underlying Funds.

"Darren McKall"
Manager, Investment Funds Branch
Ontario Securities Commission