Cana­dian reg­u­la­tors open door to ‘al­ter­na­tive’ funds for re­tail in­vestors

St. Thomas Times-Journal - - BUSINESS NEWS - BAR­BARA SHECTER

TORONTO — Cana­dian reg­u­la­tors have put fi­nal rules in place that will al­low re­tail in­vestors to put their money into funds that share many at­tributes of a hedge fund— such as em­ploy­ing lever­age and short-sell­ing, and in­vest­ing in illiq­uid in­vest­ments.

Some of these so-called liq­uid al­ter­na­tive — or “liq­uid alt” — funds are al­ready avail­able, due to ex­emp­tions granted by ear­lier this year by the On­tario Se­cu­ri­ties Com­mis­sion.

“Sales are go­ing well. We’ve raised about $35 mil­lion of as­sets into the new funds,” said Ja­son Mann, co-founder and chief in­vest­ment of­fi­cer of Edge­Hill Part­ners, which launched six funds. Five of them use strate­gies that mir­ror the ones that have been em­ployed in Edge­Hill’s pri­vate funds for more than five years.

Hedge funds in Canada have long been the ex­clu­sive ter­ri­tory of in­sti­tu­tional in­vestors and other so­phis­ti­cated mar­ket play­ers be­cause they were con­sid­ered too risky for the av­er­age re­tail in­vestor.

The new funds re­quire de­tailed dis­clo­sure in a prospec­tus, as well as in­terim and an­nual fi­nan­cial state­ments, which is meant to pro­vide a layer of in­vestor pro­tec­tion.

As the new rules for al­ter­na­tive funds made their way through the reg­u­la­tory process over the past few years, some ob­servers won­dered whether more oner­ous obli­ga­tions would dampen the en­thu­si­asm for the big banks for dis­tribut­ing non-proprietary prod­ucts such as al­ter­na­tive funds.

And in­vestor ad­vo­cacy groups such as the Foun­da­tion for the Ad­vance­ment of In­vestor Rights (FAIR Canada) op­posed the reg­u­la­tory changes al­to­gether, ar­gu­ing against grant­ing re­tail in­vestors “easy ac­cess to al­ter­na­tive funds which are tra­di­tion­ally com­plex, illiq­uid and higher risk.”

Last year, a re­port pro­duced by Cana­dian Im­pe­rial Bank of Com­merce last year — which re­ferred to liq­uid al­ter­na­tive funds as “The Next Mar­ket Dis­rup­tor” — pre­dict- ed de­mand for the prod­uct could ul­ti­mately top $100 bil­lion.

Mann says Edge­Hill’s new funds are be­ing dis­trib­uted through in­de­pen­dent deal­ers and three ma­jor banks — Bank of Nova Sco­tia, Royal Bank of Canada and Na­tional Bank of Canada — and talks with oth­ers are on­go­ing.

He said al­ter­na­tive funds are ap­peal­ing to banks that are look­ing to pro­vide clients with the op­tion of more “de­fen­sive” funds to help weather the next bear mar­ket.

“Sco­tia for ex­am­ple has a rec­om­mended list of al­ter­na­tive prod­ucts and our mar­ket neu­tral fund is one of them,” he said.

“Ul­ti­mately, we think they all will al­low for them to be sold given they are reg­u­lated prod­ucts, but if there is no track record some of the banks will treat it as a “high risk” in­vest­ment,” he said.

Darin Ren­ton,a part­ner in the fi­nan­cial prod­ucts and services group at law firm Stike­man El­liott LLP in Toronto, said re­tail de­mand for such prod­ucts is ex­pected to drive wide­spread dis­tri­bu­tion.

“But there will be grow­ing pains,” he pre­dicted.

“At the out­set, there is a con­cern that the bank chan­nels of dis­tri­bu­tion may treat all al­ter­na­tive mu­tual funds as ‘high risk’ (even though) that may not co­in­cide with a lower in­vest­ment risk level as cal­cu­lated by the man­ager.”

The new Cana­dian rules come on the heels of the wide­spread adop­tion of al­ter­na­tive funds in other ju­ris­dic­tions, in­clud­ing the United States and Europe.

Ren­ton said there is a “wide con­sen­sus” that al­ter­na­tive funds could have a mean­ing­ful im­pact on the Cana­dian fund mar­ket.

“For years, the ag­gre­gate mar­ket cap­i­tal­iza­tion of the closed-end fund mar­ket hov­ered around the $30 bil­lion mark and based on the ex­pe­ri­ence with liq­uid alts in the U.S., the early fore­cast is that the de­mand for al­ter­na­tive funds will sur­pass that mark,” he said.


The On­tario Se­cu­ri­ties Com­mis­sion of­fices in Toronto are seen in 2013.

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