Proposed amendments to modernize the investment fund regulatory framework will provide greater access to alternative investment strategies for many financial advisors and their clients. However, there still is much work to be done before these types of funds become available.
“The market is really excited about the new asset class, and everybody is hoping that it’s going to have a meaningful impact,” says Lori Stein, counsel, investment funds and asset-management group, with Toronto-based law firm Osler Hoskin & Harcourt LLP.
In 2016, the Canadian Securities Administrators proposed changes to National Instrument (NI) 81-102: Investment Funds in an effort to modernize the rules regarding investment funds. As part of these changes, commodity pools, which are available through an offering memorandum to accredited investors and other exempt clients only at this point, will be renamed “alternative funds” and be available widely through a prospectus.
These alternative-mandate funds will be able to employ strategies such as short-selling up to 50% of the net asset value (NAV) with no cash cover requirements and using leverage up to three times NAV. The proposed rules also would allow conventional mutual funds to invest in precious metals besides gold and to have up to 10% exposure to alternative funds.
Although the changes are expected to be finalized later this year, a potential “wrinkle,” says Stein, is that the time frame may be delayed if regulators make substantial changes to some of the proposed rules. That would result in further public consultation.
“Everybody wants a final rule to be published, [but] we’re still not 100% sure whether that’s going to be possible,” Stein says.
Regardless of when the new rules come into effect, they will open up several possibilities – and changes – within the investment industry and impact everyone from boutique hedge fund portfolio managers and large asset managers to advisors.
For example, asset managers will be able to introduce new alternative funds or fund-of-funds strategies.
In fact, Toronto-based Mackenzie Financial Corp. launched an alternative fund, Mackenzie Multi-Strategy Absolute Return Fund, in May. That fund was designed using the proposed alternative investment framework after the firm received exemptive relief from NI 81-102 for that fund.
“This is a strategy that all Canadian retail investors should benefit [from],” says Michael Schnitman, senior vice president, product, with Mackenzie Investments. “And so, bringing [the fund] to market as soon as possible was a key objective.”
The Mackenzie fund, which may employ several alternative strategies, such as long/short equity, is intended to provide positive returns over the course of a market cycle regardless of market conditions. The fund currently is available only through investment dealers.
Meanwhile, some asset managers may look to increase their expertise in the alternative space through acquisitions or subadvisory partnerships.
“You might see some of the large, traditional asset managers looking to purchase a boutique [hedge] fund-management firm,” says Claire Van Wyk Allan, director and head of the Canadian chapter of Britain-based Alternative Investment Management Association (AIMA Canada), “so [the purchasing company] can offer that expertise in-house.”
In other cases, traditional asset managers that have experience in working within the rules of NI 81-102 may seek out relationships with subadvisors that are hedge fund managers.
“That’s a nice match of partners,” says Stein, “one of which brings the public investment funds infrastructure and the other brings alternative investment management expertise.”
Yet, whether such a fund is sub-advised or managed in-house, the nature of the proficiency requirements that advisors with a mutual funds licence will need to sell these funds still is unclear, says Stein: “That’s a piece of the frame- work that wasn’t in place in draft. That’s a real area of uncertainty – everybody is waiting to see what the final framework states.”
In the meantime, AIMA Canada, the Toronto-based Canadian Association of Alternative Strategies & Assets (CAASA) and asset-management firms are working to create education resources and new tools for advisors and their firms.
AIMA Canada has prepared a retail education presentation for investment advisors about the benefits of these strategies. The association also is creating a “retail-friendly” due-diligence questionnaire for advisors to use when interviewing wholesalers or portfolio managers.
Mackenzie also has added several education resources about its new fund and the alternative space, in general, on its website. And CAASA is working on resources to help advisors explain these new products to clients – particularly in relation to risk.
“[Advisors] need a way to explain why they [recommend a fund with an alternative mandate],” says James Burron, president of CAASA, “what’s in the portfolio and what [the fund] will do in different types of markets.”