Star Hedge Managers Corp. II

Decision

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption from National Instrument 81-106 Investment Fund Continuous Disclosure to permit an investment fund to calculate its NAV on a monthly basis subject to certain conditions -- relief will terminate if the reporting by an underlying private investment fund becomes more frequent.

Applicable Legislative Provisions

National Instrument 81-106 Investment Fund Continuous Disclosure, s. 14.2(3)(a).

March 28, 2011

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

STAR HEDGE MANAGERS CORP. II

(the "Filer")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for relief from Section 14.2(3)(a) of National Instrument 81-106 -- Investment Fund Continuous Disclosure ("NI 81-106"), which requires the net asset value ("NAV") of an investment fund that does not use specified derivatives (as such term is defined in National Instrument 81-102 -- Mutual Funds) be calculated at least once in each week (the "Exemption Sought").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(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 Multinational Instrument 11-102 -- Passport System ("MI 11-102") is intended to be relied upon in the jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon Territory and Nunavut.

Interpretation

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

Representations

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

1. The Filer is a non-redeemable investment fund incorporated under the laws of the Province of Ontario. BMO Nesbitt Burns Inc. (the "Administrator") is the administrator of the Filer. The principal office of the Filer and the Administrator is located at 1 First Canadian Place, 100 King Street West, 3rd Floor Podium, P.O. Box 150, Toronto, Ontario M5X 1H3. The Filer is not in default of securities legislation in any jurisdiction.

2. The Filer has been created to provide investors with long-term capital growth by investing in a portfolio (the "Portfolio") consisting of private investment funds managed by three of Canada's leading portfolio managers: Rohit Sehgal of Dynamic Funds, Eric Sprott of Sprott Asset Management LP and Frank Mersch of Front Street Investment Management Inc. ("Front Street").

3. The Portfolio will initially consist of approximately equal investments in Series FC units of Dynamic Power Hedge Fund managed by Rohit Sehgal (the "Dynamic Fund"), Class I units of Sprott Hedge Fund L.P. II managed by Eric Sprott (the "Sprott Fund") and Series F units of Front Street Canadian Hedge managed by Frank Mersch (the "Front Street Fund") (each a "Portfolio Fund" and collectively, the "Portfolio Funds").

4. The Filer may establish a revolving credit facility which will be used by the Filer for general working capital purposes in an amount not exceeding 5% of the NAV of the Filer at the time of borrowing. Borrowings under the revolving credit facility will be made in the discretion of the Administrator.

5. The Dynamic Fund, the Sprott Fund and the Front Street Fund may from time to time employ leverage. The Dynamic Fund may use leverage to borrow cash or securities, purchase securities on margin, take short sale positions, write uncovered options or enter into other derivatives transactions for non-hedging purposes. The Dynamic Fund will not enter into any leverage transaction if such transaction would cause the Dynamic Fund's total net marked-to-market leverage position to exceed 30% of its last determined NAV. The Dynamic Fund will not effect a short sale at any time during which its aggregate open short positions represent in excess of 30% of its NAV. The Dynamic Fund may pledge or provide a security interest over any of its assets in respect of its permitted leverage or permitted borrowing or in other circumstances where required to effect permitted transactions. There is no prescribed limit in the amount of leverage that may be used by the Sprott Fund. The Front Street Fund may use leverage by incurring indebtedness in the form of margin debt. In providing margin to the Front Street Fund, the Front Street Fund's prime broker will be subject to capital margin requirements of the Investment Industry Regulatory Organization of Canada. Such indebtedness incurred by the Front Street Fund may be secured by the Front Street Fund's portfolio.

6. Although the Filer will be a mutual fund corporation for purposes of the Income Tax Act (Canada), it will not be a mutual fund for purposes of securities legislation and its operation will differ from that of a conventional mutual fund as follows:

(a) the Filer does not intend to continuously offer Units once the Filer is out of primary distribution, and

(b) the Class A Shares are expected to be listed and posted for trading on the Toronto Stock Exchange (the "TSX"). As a result, holders of Class A Shares (the "Shareholders") will not have to rely solely on the redemption features of the Class A Shares (as described in the Preliminary Prospectus) in order to provide liquidity for their investment.

7. Class A Shares may be surrendered at any time for redemption by the Filer. The Class A Shares will be redeemable at the option of Shareholders on a monthly basis at a price computed by reference to the market price of the Class A Shares. Commencing in 2012, the Units will also be redeemable once annually at a price computed by reference to the NAV of the Filer.

8. Each of the Dynamic Fund and the Front Street Fund will report its respective NAV to the Filer weekly in accordance with the terms of the Filer's investment in the Series FC units of the Dynamic Fund and the Series F units of the Front Street Fund, respectively. The Sprott Fund will report the NAV of its Class I units to the Filer monthly. The Sprott Fund does not report the NAV of its Class I units to any investor or third party at a frequency greater than once monthly.

9. The NAV of the Filer will be based on the value of the Filer's holdings in the Portfolio Funds. As a result, the Filer may report its NAV only as frequently as the Portfolio Fund which reports its NAV the least frequently. Of the three Portfolio Funds, the Sprott Fund reports its NAV the least frequently (monthly). To require the Filer to report its NAV more frequently than monthly would result in the use by the Filer of NAV information with respect to the Sprott Fund which is not up to date and which may ultimately be misleading to investors.

10. The basic and diluted NAV of the Fund and NAV per Class A Share (if applicable) will be made available at no cost on a monthly basis on a website established for such purpose. The Fund's final prospectus will disclose that this method of obtaining the NAV will be available to Shareholders.

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 Exemption Sought is granted provided that:

(a) the NAV calculation is available to the public upon request; and

(b) the public has access to a website for this purpose;

for so long as:

(c) the Class A Shares are listed on the TSX; and

(d) the Filer calculates its NAV at least monthly;

until

(e) the Sprott Fund begins to report its NAV to the Filer more frequently than once monthly.

"Vera Nunes"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission