IFC Alternative Managed Products 2 — Questions and Answers
Question 1: Under NI 81-102, which regulatory change in 2019 allowed retail investors in Canada to access hedge-fund-like strategies through conventional mutual funds?
- Introduction of labour-sponsored investment fund rules
- Creation of the alternative mutual fund category (Correct answer)
- Expansion of exempt market dealer registration
- Removal of concentration limits for all mutual funds
Correct answer: Creation of the alternative mutual fund category
The 2019 amendments to NI 81-102 established the 'alternative mutual fund' category, allowing retail investors to access liquid alternative strategies within a regulated mutual fund wrapper.
Question 2: An alternative mutual fund in Canada may use leverage up to what maximum gross exposure relative to its net asset value?
- 100%
- 200%
- 300% (Correct answer)
- 500%
Correct answer: 300%
NI 81-102 permits alternative mutual funds to leverage up to 300% of NAV through borrowing, short selling, and derivatives combined.
Question 3: Which of the following best describes a 'commodity pool' under Canadian securities regulation?
- A mutual fund that invests primarily in physical commodities or commodity futures (Correct answer)
- A fund that pools capital exclusively for real estate development projects
- A closed-end fund listed on a commodity exchange
- A fund that tracks a commodity index using only equity securities
Correct answer: A mutual fund that invests primarily in physical commodities or commodity futures
A commodity pool is a mutual fund that primarily invests in physical commodities, commodity futures, or other commodity-related derivatives.
Question 4: A hedge fund charges a 2% management fee and a 20% performance fee with a high-water mark. If the fund loses 15% in year one and gains 25% in year two, in which year does the manager collect the performance fee?
- Year one only
- Year two only, but only on gains above the previous high-water mark (Correct answer)
- Both year one and year two
- Neither year, because losses exceeded gains over the two-year period
Correct answer: Year two only, but only on gains above the previous high-water mark
The high-water mark ensures the performance fee is only charged on gains that exceed the fund's previous peak NAV, so no fee is earned until losses are recovered.
Question 5: Which distribution channel is most commonly used for hedge funds sold to Canadian retail investors seeking liquid alternative exposure?
- Exempt market through offering memorandum
- TSX-listed closed-end fund units
- Alternative mutual funds distributed under a simplified prospectus (Correct answer)
- Labour-sponsored investment fund shares
Correct answer: Alternative mutual funds distributed under a simplified prospectus
Since 2019, alternative mutual funds filed under a simplified prospectus provide retail investors with liquid, regulated access to hedge-fund strategies.
Question 6: A fund of hedge funds provides investors with which primary advantage compared with investing in a single hedge fund?
- Elimination of all management fees across the portfolio
- Guaranteed capital protection through diversification
- Diversification across multiple hedge fund managers and strategies (Correct answer)
- Simplified tax reporting through a single T3 slip
Correct answer: Diversification across multiple hedge fund managers and strategies
A fund of hedge funds spreads capital across multiple managers and strategies, reducing the impact of any single manager's underperformance or fraud.
Question 7: Short selling within an alternative mutual fund exposes investors to which unique risk NOT present in a conventional long-only mutual fund?
- Currency risk from foreign denominated positions
- Theoretically unlimited loss potential if the shorted security rises indefinitely (Correct answer)
- Liquidity risk from investing in illiquid securities
- Concentration risk from holding a single large position
Correct answer: Theoretically unlimited loss potential if the shorted security rises indefinitely
Short selling carries theoretically unlimited downside because a shorted security's price can rise without limit, unlike a long position where the maximum loss is the amount invested.
IFC Alternative Managed Products 2
Under NI 81-102, which regulatory change in 2019 allowed retail investors in Canada to access hedge-fund-like strategies through conventional mutual funds?