Revisiting commodity pools through a liquid-alt lens

The institution of a new alternative-fund framework has had implications on the unique investment vehicles

Revisiting commodity pools through a liquid-alt lens

During the process of setting up its new framework for alternative mutual funds, Canadian securities regulators had to enact amendments to restrictions and limitations codified in several National Instruments, most notably NI 81-102 Investment Funds.

The changes have also impacted commodity pools, which have traditionally existed as unique investment vehicles governed under National Instrument 81-104 Commodity Pools. A recent commentary provided by an expert from Norton Rose Fulbright Canada goes over some of the brass tacks in that area.

“When the [changes] came into force on January 3, 2019 … all commodity pools that existed [beforehand] were automatically converted to conform to the new requirements,” noted Peter Valente. “A further six month period was granted to these converted funds to conform to the new requirements, which lapsed on July 4, 2019.”

Valente noted that under previous NI 81-104 provisions, commodity pools required a minimum of $50,000 in seed capital, and any such fund needed to have at least that much at all times. With the new harmonized seed capital and start-up requirements for all mutual funds, the minimum seed capital requirement has been raised to $150,000, and the providers of seed capital for any fund cannot withdraw any of that capital until the fund has raised at least $500,000 from outside investors.

With respect to concentration limits, he said the cap on the amount of fund assets that can be invested in a single issuer has been raised from 10% to 20% of a fund’s NAV. Alternative mutual funds are also free to invest in precious metal certificates, and they are not beholden to the 10%-of-NAV limit on direct or indirect investment in physical commodities that applies to conventional mutual funds.

And while commodity pools were previously allowed to invest in other funds only if they were conventional mutual funds with a simplified prospectus, they are now able to invest up to 100% of their NAV in any other investment fund that’s subject to NI 81-102.

Valere also noted numerous other investment restrictions and capabilities that alternative mutual funds, including commodity-based strategies, such as:

  • A 10%-of-NAV limit on investments in illiquid assets;
  • The ability to borrow cash up to 50% of their NAV, subject to certain restrictions;
  • The ability to short-sell securities whose market value does not exceed 50% of the fund’s NAV, with a 10%-of-NAV limit on securities from a single issuer;
  • The ability to concurrently borrow cash and short sell as long as the combined amount does not exceed 50% of the NAV;
  • The ability to use direct or indirect leverage (with aggregate exposure not exceeding 300% of NAV) from cash borrowing, short selling, and specified derivatives transactions, excluding for hedging purposes; and
  • The ability to enter into specified derivatives transactions with counterparties that may not have an “approved credit rating,” provided that the fund’s exposure to any one counterparty does not exceed 10% of NAV on a mark-to-market basis.


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