Browse Analysis of Managed and Structured Products

20.4.6 Exchange-traded Funds (etfs)

Comprehensive overview of Exchange-traded Funds (ETFs) regulations, features, and comparative benefits in the context of the Canadian Securities Course.

Exchange-Traded Funds (ETFs)

Certain ETFs, like leveraged and inverse products, were previously regulated under NI 81-104, which allowed them some flexibility with respect to derivatives and leverage but not short selling of non-derivative securities. These strategies are now discussed under modernized NI 81-102 regulations in the alternative investment strategies section. In the U.S., liquid alternative ETFs have grown in number and market share and now comprise slightly less than 10% of all liquid alternative investments.

One of the main advantages of ETFs, compared to hedge funds or liquid alts, is the ability to trade them intra-day on an exchange. However, the benefit of this liquidity can be minimal for ETFs utilizing alternative strategies such as long/short. For other strategies, intra-day trading can provide significant advantages.

Comparing Alternative Mutual Funds with Conventional Mutual Funds and Hedge Funds

Similarities and Differences

Alternative strategies can be housed in various investment structures, mainly hedge funds and alternative mutual funds. These alternative mutual funds offer protections not typically found in hedge funds, such as transparency, liquidity, and regulatory oversight, but at a certain cost. For instance:

  • Leverage and Short Selling: Liquid alternatives can use leverage and short selling more liberally than mutual funds but face more restrictions compared to hedge funds.
    • Alternative mutual funds can short sell up to a maximum of 50% of the fundโ€™s NAV with no cash cover.
    • Conventional mutual funds can short sell up to a maximum of 20% of NAV and require 100% cash cover.
    • Hedge funds can short sell to any extent and without cash cover, depending on their offering memorandum.
  • Derivatives: Liquid alternatives have flexibility similar to hedge funds for non-hedging purposes without cash cover but have an overall leverage limit of 300% of NAV. Conventional mutual funds require 100% cash cover and generally prohibit leverage.

Key Differences Between Conventional Mutual Funds and Alternative Funds

Table 20.2 highlights the main product features and regulatory restrictions for conventional mutual funds, traditional hedge funds, and alternative mutual funds.

Regulatory Aspects

Feature Conventional Mutual Funds Hedge Funds Alternative Mutual Funds
Disclosures Simplified prospectus, AIF, Fund Facts Offering memorandum Same as conventional mutual funds but simplified if listed on a stock exchange
NAV Calculation Weekly, daily if using specified derivatives or short selling Monthly/Quarterly Same as conventional mutual funds
Holdings Disclosure Monthly Top 10 holdings; Quarterly full report As per offering memorandum Same as conventional mutual funds
Continuous Disclosure Annual & semi-annual financials, Fund Performance, Material changes As per offering memorandum Same as conventional mutual funds
Investment Objective Maximize relative return with downside protection Maximize absolute return with downside protection Same goal as hedge funds but subject to traditional fund regulations
Strategy Allowances Permits minimal alternate strategy involvement Permits extensive alternate strategies More liberal than mutual funds but more restrictive than hedge funds
Convenience Daily liquidity Monthly or Quarterly liquidity as per offering memorandum Same as conventional mutual funds
Fees Admit management and performance tied to an index As defined in offering memorandum; allow investor-to-manager fees Similar to mutual funds but potential lower fees related to mixed structure
Redemption Daily, but subject to unusual market conditions Monthly to periodic management-reviewed; possibly up-to quarterly Same daily liquidity
Minimums Typically low cost, retail-centric range ($100 - $1,000 Initial Investment) High investment from accredited investors ($100K or greater) Mimics conventional mutual fund approach with broadened suitability
Management Beyond Funds Prohibit expense sharing among managed funds Allow sharing Prohibited when involving other expenses beyond directly regulated

Key Takeaways

  • ETFs Shadow Regulations: Regulations for leveraged and inverse ETFs are seated in baseline NI 81-104 and modern NI 81-102.
  • Flexible Holdings: Illustration shows how trends incorporate both primary hedge funds into newer, deterministic models.
  • Risk elements: Evaluates spread for types per regulatory format among managed investment programs.
  • Strategies Impacts: Trends direct comparison across existing structured managed with alternatives significant niche returns eg.solvent enforcing strategies.

Frequently Asked Questions

1. Why do alternative mutual funds often have lower leverage allowances than hedge funds?

Alternative mutual funds, while having more liberal restrictions on leveraging compared to traditional mutual funds, still experience stricter oversight compared to hedge funds. The bet-taking extends evaluates magnified potential loss risks through diversified aimed safeguarding diversifiable financial base come stakeholders spread risks.

2. What makes intra-day trading an intended venture useful for most ETFs?

Intraday establishments feature trading optimizes liquidity horizon when achieved correctly evaluating flexible asset tactics thus seen expanding returns through flexible structured transforming revenue generated interaction. Specific to involving stakes testing immediate interactive user-communication insightful correlations optimizing less than mainstream led diversified market monetizable occupation.


CSCยฎ Exams Practice Questions

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Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. ๐Ÿ“˜โœจ

Good luck!

## Which Canadian regulatory instrument modernized the regulation of all ETFs utilizing alternative strategies? - [x] NI 81-102 - [ ] NI 81-104 - [ ] NI 41-101 - [ ] NI 51-101 > **Explanation:** All ETFs, including those utilizing alternative strategies, are now regulated under the modernized NI 81-102. ## What is a key advantage of exchange-traded funds (ETFs) over hedge funds and liquid alts? - [x] The ability to trade them intra-day - [ ] Higher after-fee returns - [ ] Unlimited leverage - [ ] Absence of regulatory oversight > **Explanation:** One of the main advantages of ETFs versus hedge funds or liquid alts is the ability to trade them intra-day on an exchange. ## In what areas do alternative mutual funds offer greater protection compared to hedge funds? - [x] Transparency, liquidity, and general regulatory oversight - [ ] Lower management fees - [ ] Higher leverage limits - [ ] Greater concentration of investments > **Explanation:** Alternative mutual funds offer greater protection in the areas of transparency, liquidity, and general regulatory oversight compared to hedge funds. ## What is the maximum leverage limit for liquid alternative funds according to NI 81-102? - [ ] 200% of NAV - [x] 300% of NAV - [ ] 400% of NAV - [ ] 100% of NAV > **Explanation:** Liquid alternatives are subject to an overall leverage limit of 300% of NAV. ## Which of the following strategies requires 100% cash cover in conventional mutual funds but not in hedge funds or liquid alternatives? - [x] Using derivatives for speculation - [ ] Short selling - [ ] Investing in physical commodities - [ ] Investing in other mutual funds > **Explanation:** Conventional mutual funds require 100% cash cover for using derivatives for speculation, while hedge funds and liquid alternatives do not. ## How often are conventional mutual funds required to calculate NAV when engaging in specified derivatives or short selling? - [ ] Weekly - [x] Daily - [ ] Monthly - [ ] Quarterly > **Explanation:** Conventional mutual funds must calculate NAV daily if they use specified derivatives or engage in short selling. ## What is the maximum short-selling limit for hedge funds based on their offering memorandum? - [ ] 20% of NAV - [x] Variable, as per offering memorandum - [ ] 10% of NAV - [ ] Not allowed > **Explanation:** Hedge funds' short-selling limits are determined by their offering memorandum and can vary accordingly. ## How do the fees for alternative mutual funds and conventional mutual funds typically compare? - [ ] Alternative mutual funds have higher management fees but lower performance fees than conventional mutual funds. - [ ] Both have the same fee structure mandated by NI 81-102. - [x] Both can charge management fees but alternative mutual funds can also charge performance fees. - [ ] Alternative mutual funds cannot charge performance fees. > **Explanation:** Both alternative mutual funds and conventional mutual funds can charge management fees, but alternative mutual funds can also charge performance fees. ## What level of initial investment is typically required for a hedge fund? - [x] $100,000 โ€“ $150,000 - [ ] $500 โ€“ $5,000 - [ ] $50,000 โ€“ $75,000 - [ ] No minimum required > **Explanation:** Hedge funds typically require an initial investment size ranging from $100,000 to $150,000. ## During a period of market distress, how do returns of hedge funds compare to those of liquid alt funds? - [ ] Hedge fund returns significantly outperform liquid alt funds. - [ ] Liquid alt funds suffer higher losses compared to hedge funds. - [x] Differences in absolute returns narrow. - [ ] Hedge funds cease to trade. > **Explanation:** During periods of market distress, the differences in absolute returns between hedge funds and liquid alts narrow.

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