Fund News

Regulators ease constraints on leveraging, short-selling and security-specific risk.
By Rudy Luukko | 03/05/18

Mackenzie Investments has received the green light from securities regulators for Mackenzie Multi-Strategy Absolute Return, a prospectus-offered hedge fund with remarkably relaxed risk constraints. The fund, managed internally by three Mackenzie teams, has a minimum investment of as low as $500 for retail purchase options. It's scheduled to go on sale on May 23, with the delayed rollout giving the company more time to educate its distributors on one of its most complex retail products.

About the Author
Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

In its May 2 product announcement, Mackenzie bills itself as the first company to bring to market for Canadian retail investors a fund that is based on the Canadian Securities Administrators' "alternative framework proposal" for retail funds. As Michael Schnitman, Mackenzie's senior vice-president of product, told Morningstar, the types of exemptive relief that the company has been able to obtain are part of proposed regulatory reforms but not official policy.

Normally, a mutual fund that is accessible to small investors has very strict limits and conditions on how much it can borrow. Not this fund. Regulators have granted an exemption allowing the Mackenzie managers to borrow cash totalling up to 50% of the fund's net asset value (NAV).

The fund is also allowed to engage in short-selling of securities with values totalling of up to 50% of NAV. The normal limit for mutual funds is 20%, and that's only if the fund manager applies successfully to the regulators for exemptive relief.

The Mackenzie fund has also received permission to employ leverage of up to three times its NAV, for which the calculations are based on a combination of its short-selling exposure and its use of derivatives. As for portfolio concentration, regulators are allowing Mackenzie to hold up to 20% of the fund's assets in a single security. The normal limit for mutual funds is 10%.

The nearly no-holds-barred nature of this fund has been approved by regulators with the expectation that Mackenzie's investment objective is one of prudent diversification and risk management. The fund's managers aim to generate positive total returns over a market cycle, regardless of market conditions.

The investment case for funds such as Mackenzie's new offering, and hedge funds of a similar nature that are generally available only to accredited investors and institutional accounts, is that they have relatively low correlations with the equity and fixed-income markets, thus providing additional portfolio diversification.

The regulators weren't entirely won over by Mackenzie, since they have imposed restrictions on distribution channels. The fund will be available only to dealers that are regulated by the Investment Industry Regulatory Organization of Canada (IIROC). The regulators declined to allow Mackenzie to distribute the fund through Mutual Fund Dealers Association dealers, presumably because the MFDA's proficiency and educational requirements are regarded as less stringent.

Mackenzie's Schnitman contends that the fund is suitable as a core holding for individual investors, adding that it may be of particular interest to those who are nearing retirement. "What an absolute-return strategy can provide is a smoother rate of return over time to help people combat sequence-of-return risks."

How the returns will play out for investors in Mackenzie Multi-Strategy Absolute Return remains to be seen, of course. But the combination of investment strategies -- credit absolute return, global macro, long-short equity and equity market-neutral -- suggests that the managers will hedge their bets to a considerable degree.

Though there are long-term strategic allocations to each strategy, the Mackenzie asset-allocation team will make tactical shifts over the short to medium term, based on their market outlook and risk assessment. This team is headed by Alain Bergeron, who will serve as lead manager of the new fund.

The Bergeron-led team will also be responsible for the portion of the fund allocated to global macro strategies. These strategies will provide long and short exposure to equities, fixed-income securities, currencies, interest-rate futures and commodities.

Mackenzie's systematic-strategies team, headed by Richard (Rick) Weed, will be responsible for the fund's "130-30" long-short equity and market-neutral strategies. The Weed-led team's long-short strategy is based on multi-factor quantitative criteria. The market-neutral strategy, meanwhile, is bottom-up in nature and will seek to exploit pricing inefficiencies between related equity securities and neutralizing exposure to market risk by maintaining long and short positions.

Mackenzie's fixed-income team, headed by Steven Locke, will be responsible for the fund's credit-related strategies. They'll employ multiple sectors, geographies, and parts of the capital structure, in pursuing a leveraged long-short and/or a momentum-long approach to corporate investments. Other tools in this team's toolkit include a long-short currency model and a duration-timing model.

As noted in the prospectus, this portion of the fund will invest across various fixed-income credit ratings, duration, structures, sectors, currencies and countries, and may, at any time, invest a significant portion of its net assets in any one area."

Unlike many hedge funds that are sold via offering memorandum to large accounts, the Mackenzie fund will not charge a performance fee. The fund's management fee is 2.25% for Series A, which pays dealers a trailer commission of 1% a year and also allows them to charge a front-end load. An administration fee of 0.28% annually covers most expenses. There is no deferred-sales-charge option, a compensation model generally frowned upon by regulators.

Other options include Series F, for fee-based accounts in which investors pay their advisors directly. This series charges a management fee of 1.15%, and the administration fee is 0.15%.

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