RP Investment Advisors LP and The Funds

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- alternative mutual funds granted from: subsection 2.6(2), section 2.6.1 and section 2.6.2 of NI 81-102 to borrow cash and short sell up to 100% of NAV, and subsection 6.1(1) of NI 81-102 to appoint additional custodians and to clarify that short sale proceeds are excluded for the purposes of calculating non-custodial borrowing agent collateral limits under section 6.8.1 of NI 81-102, subject to conditions.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.6(2), 2.6.1 and 2.6.2.

April 30, 2025

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 RP INVESTMENT ADVISORS LP (the Filer) AND THE FUNDS (AS DEFINED BELOW)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the Funds (as defined below) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting each of the Funds from the following restrictions in of NI 81-102 in order to permit each Fund to (A) borrow cash for investment purposes in an amount which does not exceed 100% of the NAV of the Fund, (B) borrow securities (other than Government Securities) from a borrowing agent to sell such securities short whereby the aggregate market value of all securities (excluding Government Securities) sold short by the Fund does not exceed 100% of the NAV of the Fund; provided that, at all times, the aggregate market value of all cash borrowed combined with all securities (excluding Government Securities) sold short by the Fund does not exceed 100% of the NAV of the Fund

(i) subparagraph 2.6.1(1)(c)(v) of NI 81-102, which restricts the Fund from selling a security short if, at the time, the aggregate market value of all securities sold short by the Fund exceeds 50% of the Fund's NAV (together with (a)(iii) below, the Short Selling Limit);

(ii) subparagraph 2.6(2)(c) of NI 81-102, which restricts the Fund from borrowing cash if the value of cash borrowed, when aggregated with the value of all outstanding borrowing by the Fund, exceeds 50% of the Fund's NAV (together with (a)(iii) below, the Cash Borrowing Limit); and

(iii) section 2.6.2 of NI 81-102, which restricts the Fund from borrowing cash or selling securities short if, immediately after entering into a cash borrowing or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of all securities sold short by the Fund (the Combined Aggregate Value) would exceed 50% of the Fund's NAV and which requires the Fund, if the Combined Aggregate Value exceeds 50% of the Fund's NAV, as quickly as commercially reasonable, to take all necessary steps to reduce the Combined Aggregate Value to 50% or less of the Fund's NAV;

(the Exemptions Sought).

Under National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions:

A. the Ontario Securities Commission is the principal regulator for this Application, and

B. 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 each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).

Interpretation

Terms defined in MI 11-102, National Instrument 14-101 -- Definitions, NI 81-102, NI 81-107 and NI 31-103 have the same meaning if used in this decision, unless otherwise defined.

The following terms have the following meanings:

Alternative Mutual Fund means an alternative mutual fund, as defined in NI 81-102;

Cash Borrowing Limit means the limit of 50% of NAV for cash borrowing transactions by alternative mutual funds set out in subparagraph 2.6(2)(c) of NI 81-102.

Existing Fund means the RP Alternative Global Bond Fund.

Existing Relief means the Filer's exemptive relief decision entitled "In the Matter of RP Investment Advisors LP and the Funds" (January 2, 2025), (2025), 48 OSCB 199;

Funds means, collectively, the Existing Fund and the Future Funds.

Future Funds means such future Alternative Mutual Funds which may be established by the Filer from time to time.

Government Securities, as defined in the Existing Relief, includes and is limited to: (i) a "government security" as defined in NI 81-102; and (ii) an evidence of indebtedness issued, or fully and unconditionally guaranteed as to principal and interest, by any of the federal government if the United Kingdom or the federal government of Germany;

NAV means net asset value;

Prime Broker means any entity that acts as a lender or borrowing agent, as the case may be, to one or more Funds;

Prospectus means a simplified prospectus of a Fund prepared in accordance with Form 81-101F1 Contents of Simplified Prospectus under NI 81-101 as the same may be amended from time to time; and

Short Selling Limit means the limit of 50% of NAV for short sale transactions by alternative mutual funds set out in subparagraph 2.6.1(1)(c)(v) of NI 81-102.

Representations

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

The Filer

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

2. The Filer is registered as (i) an investment fund manager in Ontario, Québec and Newfoundland and Labrador; (ii) an adviser in the category of portfolio manager in, British Columbia, Ontario and Québec; (iii) a dealer in the category of exempt market dealer in British Columbia Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon under the securities legislation of the Jurisdictions; and (iv) a commodity trading manager in Ontario under the Commodity Futures Act (Ontario).

3. The Filer is the investment fund manager and portfolio manager of the Existing Fund and will be the investment fund manager and portfolio manager of the Future Funds. As such, the Filer is, or will be, responsible for managing the assets of the Funds and has, or will have, complete discretion to invest and reinvest the Funds' assets and is, or will be, responsible for executing all portfolio transactions.

4. The Filer is not in default of applicable securities legislation in any Jurisdiction.

The Funds

5. Each of the Funds is, or will be, organized as a trust established under the laws of the Province of Ontario or another Jurisdiction.

6. Each of the Funds is, or will be, an open-ended public alternative mutual fund governed by NI 81-102.

7. Units of the Funds are, or will be, offered by Prospectus and fund facts documents filed in one or more of the Jurisdictions and, accordingly, each Fund is, or will be, a reporting issuer in the Jurisdictions where the Exemptions Sought is relied upon.

8. The investment objective of the Existing Fund is to generate attractive risk-adjusted returns with an emphasis on capital preservation by investing primarily in investment grade debt and debt-like securities of corporations and financial institutions.

9. The investment objective of the Future Funds will generally be to seek to produce risk-adjusted returns through investments in debt and debt-like securities.

10. The investment strategies utilized (or to be utilized) by each of the Funds will differ but, in each case, key investment strategies which may be utilized by a Fund will include (a) the use of hedging, offsetting, inverse or shorting strategies requiring the use of short selling of securities (other than Government Securities) in excess of the Short Selling Limit and/or (b) the use of cash borrowing to provide additional investment exposure in connection with the investment strategies of the Fund in excess of the Cash Borrowing Limit.

11. The Existing Fund is not in default of the securities legislation of any of the Jurisdictions.

The Existing Relief

12. In order to hedge against the inherent interest rate risk associated with the corporate fixed income securities invested in by the Funds, the Filer enters into, or will enter into, short selling arrangements relating to Government Securities at the same time that the Fund invests, or will invest, in long positions in the corporate fixed income securities as further described in the Existing Relief (the Interest Rate Risk Hedging Strategy). The most effective interest rate hedge occurs where the Government Securities selected by the Filer for hedging purposes most closely correlate to the underlying interest rate characteristics of the particular corporate fixed income securities held by a Fund.

13. Subject to the terms of the Existing Relief the Funds, in connection with facilitating the Interest Rate Hedging Strategy, received exemptive relief from (i) subparagraph 2.6.1(1)(c)(iv) of NI 81-102, which restricts an Alternative Mutual Fund from short selling the securities of a single issuer, other than government securities (as such term is defined in NI 81-102), to not more than 10% of the NAV of the Fund; (ii) subparagraph 2.6.1(1)(c)(v) of NI 81-102, which restricts an Alternative Mutual Fund from selling a security short if, at the time, the aggregate market value of the securities sold short by the Alternative Mutual Fund exceeds 50% of the Alternative Mutual Fund's NAV; and (iii) section 2.6.2 of NI 81-102, which states that an Alternative Mutual Fund may not borrow cash or sell securities short if, immediately after entering into a cash borrowing or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the Alternative Mutual Fund would exceed 50% of the Fund's NAV, in order to permit each Alternative Mutual Fund to short sell Government Securities up to a maximum of 300% of its NAV (the Alternative Mutual Fund Short Selling Relief).

The Exemptions Sought

14. As part of a Fund's investment strategy, short positions can serve as both a hedge against exposure to a long position or a group of long positions and also as a source of returns with one or more offsetting long positions. Short selling hedging strategies, including those that are designed to hedge against credit risk associated with fixed income investments aim to reduce portfolio risk and volatility by having offsetting short positions that are negatively corelated with the price movement and risk characteristics of one or more long securities held by the Fund. In accordance with their respective investment objectives, the Funds will generally seek to generate an attractive risk/return profile and to reduce risk and volatility. As such, at the portfolio level, a Fund's investment strategies will seek to hedge a portion of the Fund's credit risk exposure and to generate positive performance from the difference, specifically, the spread between the performance of the portfolio's long and short positions.

15. Related strategies which offset exposure to certain markets or provide inverse exposure to particular sets of securities would also fall within the investment strategies of the Funds contemplated in this Application, and serve to reduce market risk or keep market risk at a specified level or deliver a specific investment risk-return profile that investors and their advisers can utilize for the purposes of portfolio diversification.

16. The additional ability for a Fund to engage in cash borrowing in connection with its investment strategies may provide material cost savings to the Funds compared to obtaining the same level of investment exposure through the use of specified derivatives while, at the same time, not increasing the overall level of risk to the Funds.

17. The investment strategies of each Fund permit, or will permit, the Fund to sell securities short provided that, at the time the Fund sells a security short (i) the aggregate market value of securities (other than Government Securities) of any one issuer sold short by the Fund does not exceed 10% of the NAV of the Fund; and (ii) the aggregate market value of all securities (other than Government Securities) sold short by the Fund does not exceed 100% of its NAV.

18. The investment strategies of each Fund permit, or will permit, the Fund to engage in cash borrowing transactions provided that the amount of cash borrowed does not exceed 100% of the NAV of the Fund.

19. The investment strategies of each Fund permit, or will permit, it to enter into a cash borrowing transaction or short selling transaction, provided that the aggregate value of cash borrowed combined with the aggregate market value of the securities (other than Government Securities) sold short by the Fund does not exceed 100% of the Fund's NAV (the Total Borrowing and Short Selling Limit). If the Total Borrowing and Short Selling Limit is exceeded, the Fund shall, as quickly as is commercially reasonable, take all necessary steps to reduce the aggregate value of cash borrowed combined with the aggregate market value of securities sold short to be within the Total Borrowing and Short Selling Limit.

20. The investment strategies of each Fund permit, or will permit, the Fund to borrow cash, enter into specified derivatives transactions or sell securities short, provided that immediately after entering into a cash borrowing, specified derivative or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of securities (including, for greater certainty, Government Securities) sold short and aggregate notional amount of the Fund's specified derivatives positions (other than positions held for hedging purposes, as defined in NI 81-102) would not exceed 300% of the NAV of the Fund as set out in subsection 2.9.1(5) of NI 81-102 (the Leverage Limit). If the Leverage Limit is exceeded, the Fund shall, as quickly as is commercially reasonable, take all necessary steps to reduce the aggregate value of cash borrowed combined with the aggregate market value of securities sold short and the aggregate notional amount of the Fund's specified derivatives positions (other than positions held for hedging purposes) to be within the Leverage Limit.

21. The Prospectus and fund facts documents of each Fund will comply with the requirements of NI 81-101 applicable to Alternative Mutual Funds, including cover page text box disclosure in the fund facts to highlight how the Fund differs from other mutual funds and emphasize that the cash borrowing and short selling strategies permitted for the Fund are outside the scope of the provisions of NI 81-102 applicable to both mutual funds and Alternative Mutual Funds.

22. The description of the investment strategies in the simplified prospectus of each Fund will clearly disclose the cash borrowing abilities and short selling strategies of the Fund (including, for greater certainty, the Alternative Mutual Fund Short Selling Relief) which are outside the scope of NI 81-102, including that the aggregate amount of cash borrowed and/or the aggregate market value of all securities (other than Government Securities) sold short by the Fund may exceed 50% of the NAV of the Fund. The Prospectus will also contain appropriate risk disclosure, alerting investors of any material risks associated with such investment strategies.

23. The Filer will determine the risk rating for each Fund using the Investment Risk Classification Methodology as set out in Appendix F of NI 81-102.

24. An Alternative Mutual Fund is permitted to take leveraged long and short positions using specified derivatives up to a maximum of 300% of its NAV. As a result, the Exemptions Sought would not be required if the Funds utilized solely specified derivatives (such as over-the-counter total return swaps) to provide additional investment exposure or to obtain short exposure to the underlying securities in connection with the Fund's investment strategies. NI 81-102 contemplates that Alternative Mutual Funds may obtain additional investment exposure (using a combination of cash borrowing and specified derivatives) subject to the Cash Borrowing Limit and may also utilize shorting strategies (using a combination of short sale transactions and specified derivatives) subject to the Short Selling Limit and, in all cases, subject to the Leverage Limit. Alternative Mutual Funds that were previously known as commodity pools provide 100% or 200% inverse exposure through the use of specified derivatives, which is consistent with the Leverage Limit and does not trigger the application of the Cash Borrowing Limit or the Short Selling Limit for which the Filer is requesting the Exemptions Sought. Accordingly, the Exemptions Sought would simply allow the Funds to do directly what they could otherwise do indirectly through the use of specified derivatives.

25. Relief from the Short Selling Limit would allow the Funds to offset the beta of their long positions through short positions in securities (other than Government Securities) in order to strategically reduce portfolio volatility where the Filer has identified potential downside risks to the market without the necessity of resorting to specified derivatives, which, as further detailed below, can be more beneficial in certain circumstances. In implementing the investment strategies of the Funds, the Filer seeks to reduce or hedge expected market exposure in order to mitigate the downside impact of market risks. This strategy is designed to be achieved by offsetting the long positions in a portfolio of securities that are expected to outperform (or to provide exposure to a particular investment strategy) against the portfolio's short positions that are expected to underperform (or to balance market risk by shorting securities that do not have the characteristics targeted under the long investment strategy). As a result, the use of a short-selling strategy provides for greater diversification as it is uncorrelated to the movements of the broader markets.

26. One of the principal benefits to the Funds having greater flexibility to choose between utilizing physical short positions or obtaining the same exposure through the use of specified derivatives relates to market access. When a Fund enters into a physical short position, it sources the security from a borrowing agent and sells the borrowed security (through a broker) on a marketplace where the security trades. The Fund's Prime Broker normally serves as the borrowing agent and can either lend the security from its own inventory or obtain the security from a different entity. As such there is competition in the securities lending industry between various Prime Brokers which typically results in lower borrowing costs.

27. In contrast, when a Fund obtains synthetic short exposure to the same position using a specified derivative, the sourcing and selling will be done by the derivatives counterparty and such counterparty will engage in the same activities as Prime Brokers described in the paragraph above in order to hedge its investment exposure to the Fund (the Counterparty Hedge). Certain derivatives counterparties have operational, business and tax reasons to limit the markets where they operate and may not enter into derivative positions with exposure to certain countries or below certain amounts. As a result, under such circumstances, the Fund may be unable to efficiently or cost effectively enter into a synthetic short position.

28. The net cost savings to using physical short selling and/or cash borrowing relative to specified derivatives primarily result from three factors:

(a) dealer financing rates may be higher for specified derivative transactions (these rates are usually charged as fees and are in addition to any interest rates charged); and

(b) monthly interest rates for specified derivative transactions (CORRA plus a spread) are generally higher than the cash (overnight) borrowing rate for cash borrowing transactions (which is CCLR plus a spread); and

(c) Prime Brokers are able to offer more favourable spreads for short selling or cash borrowing transactions as they are often able to rehypothecate collateral deposited by the Funds in connection with such transactions.

29. The Filer will actively monitor counterparty risk and only use regulated Prime Brokers for short selling and cash borrowing transactions entered into by the Funds.

30. The Exemptions Sought will provide the Filer with greater ability to choose between physical short selling and cash borrowing transactions on the one hand and specified derivative transactions on the other, thereby gaining increased flexibility to negotiate more favorable terms with counterparties.

31. The Exemptions Sought would provide the Filer, a registrant with significant expertise in these areas, with the required flexibility to make timely trading decisions between physical and synthetic short sale positions and/or achieving additional investment exposure through cash borrowing or synthetic transactions. The Exemptions Sought is necessary in order to permit the Filer to engage in the most effective portfolio management activities on behalf and for the benefit of the Funds and their unitholders.

32. As noted above, the underlying investment exposure between a physical short position, exposure obtained through cash borrowing and a corresponding synthetic position is the same, and the Funds would not be subject to any additional risks by entering into a physical short position or a cash borrowing transaction when compared to obtaining similar exposure through the use of specified derivatives (in fact, a Fund may be subject to reduced counterparty risk when entering into a physical short sale or cash borrowing transaction). It is respectfully submitted that there is no policy or investor protection rationale for imposing a 50% of NAV limit on physical short positions and cash borrowing transactions. As a registrant and fiduciary, the Filer submits that it is in the best position to determine whether a Fund should enter into physical short positions, obtain investment exposure through cash borrowing or to obtain the same exposure through synthetic positions, depending on the relevant circumstances.

33. The Exemptions Sought will provide the Filer, on behalf of the Funds, with the ability to negotiate pricing more effectively with counterparties. This is because the Filer will no longer be required to enter into synthetic positions in order to offer investment strategies that require enhanced short positions or cash borrowing capabilities, thereby avoiding a captive market for the noted counterparties and unfavourable pricing dynamics for the Funds.

34. Any physical short position entered into or additional investment exposure obtained through cash borrowing by a Fund will be consistent with the investment objectives and strategies of the applicable Fund.

35. Other than in relation to the Cash Borrowing Limit, all cash borrowing by the Funds will be conducted in accordance with the requirements of section 2.6 of NI 81-102 applicable to Alternative Mutual Funds.

36. In connection with the Existing Relief and the Exemptions Sought, each Fund has (or will) implement the following controls when conducting a short sale of securities (including Government Securities):

(a) the Fund assumes (or will assume) the obligation to return to the borrowing agent the securities borrowed to effect the short sale;

(b) the Fund receives (or will receive) cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;

(c) the Filer monitors (or will monitor) the short positions within the constraints of the Existing Relief and the Exemptions Sought as least as frequently as daily;

(d) the security interest provided by the Fund over any of its assets that is required to enable the Fund to effect a short sale transaction is made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transactions;

(e) the Filer maintains (or will maintain) appropriate internal controls regarding short sales, including written policies and procedures for the conduct of short sales, risk management controls and proper books and records;

(f) The Filer keeps (or will keep) proper books and records of short sales and all assets of a Fund deposited with borrowing agents as security; and

(g) Each Fund's aggregate exposure to short selling, cash borrowing and specified derivatives transaction used for purposes other than hedging will not exceed 300% of the Fund's NAV, in compliance with the Leverage Limit.

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 Exemptions Sought are granted provided that:

1. a Fund may sell a security (other than a Government Security) short or borrow cash only if; immediately after the short selling or cash borrowing transaction:

(a) the aggregate market value of all securities (other than Government Securities) sold short by the Fund does not exceed 100% of the Fund's NAV;

(b) the aggregate value of all cash borrowing by the Fund does not exceed 100% of the Fund's NAV;

(c) the aggregate market value of securities sold short by the Fund combined with the aggregate value of cash borrowing by the Fund does not exceed 100% of the Fund's NAV; and

(d) the Fund's aggregate exposure to short selling, cash borrowing and specified derivatives does not exceed the Leverage Limit.

2. in connection with a short sale transaction, the transaction:

(a) otherwise complies with all of the short sale requirements applicable to the Fund under the terms of the Existing Relief and under section 2.6.1 and 2.6.2 of NI 81-102; and

(b) is consistent with the investment objective and strategies of the Fund;

3. in connection with a cash borrowing transaction, the transaction:

(a) otherwise complies with all of the cash borrowing requirements applicable to Alternative Mutual Funds under section 2.6 and 2.6.2 of NI 81-102; and

(b) is consistent with the investment objectives and strategies of the Fund;

4. the Prospectus under which the securities of a Fund are offered:

(a) discloses that the Fund can sell securities (other than Government Securities) short or borrow cash up to, and subject to the limits described in condition (i) above; and

(b) describes the material terms of this decision.

"Darren McKall" 
Manager, Investment Management Division 
Ontario Securities Commission

Application File #: 2025/0194

SEDAR+ File #: 6266872