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HAP Nexus Hedge Fund Replication Trust

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HAP Nexus Hedge Fund Replication Trust Annual Report | December 31, 2015 HAP Nexus Hedge Fund Replication Trust Innovation is our capital. Make it yours. www.HorizonsETFs.com ALPHA BENCHMARK BETAPRO 87726 - HAP Nexus Hedge.indd 1 2016-03-04 3:57 PM Contents MANAGEMENT REPORT OF FUND PERFORMANCE Management Discussion of Fund Performance .....................1 Financial Highlights ...............................................6 Past Performance ..................................................9 Summary of Investment Portfolio . 11 MANAGER’S RESPONSIBILITY FOR FINANCIAL REPORTING ............13 INDEPENDENT AUDITORS’ REPORT. 14 FINANCIAL STATEMENTS Statements of Financial Position ..................................15 Statements of Comprehensive Income ............................16 Statements of Changes in Financial Position .......................17 Statements of Cash Flows .........................................18 Schedule of Investments ..........................................19 Notes to Financial Statements ....................................21 87726 - HAP Nexus Hedge.indd 3 2016-03-04 3:57 PM Letter from the Co-CEO: The story for investors in 2015 was one of a return to volatility, especially in the North American markets. Canadian equities declined noticeably and in the U.S., the S&P 500® experienced its first 10% correction in over three years, only to rally to end the year with a modest loss. Additionally, the Canadian Dollar had its worst performing year relative to the U.S. Dollar since 2008 and we saw very marginal returns from the fixed income markets. For Horizons ETFs, this year could be called “The Year of the Active ETF,” since many of our actively managed equity and fixed income ETFs delivered strong relative returns. Portfolio managers who can identify sectors or individual securities with better relative returns can, and do, deliver attractive results, assuming they are not burdened with the high management fees that can plague many actively managed mutual funds. Over the past year, we received many third party industry accolades and awards for our Active ETFs, which combine top-tier professional portfolio management with competitive management fees. This past year was also one where we demonstrated our unique market leadership position in indexing. The Horizons S&P/TSX 60™ Index ETF (“HXT”) celebrated its five-year anniversary with an additional rebate, which lowered the ETF’s effective management fee to 0.03% (from 0.05%), making it the lowest-cost fund in Canada. HXT was the first ETF that we launched with a unique total return swap structure that seeks to improve tracking error and tax efficiency by way of its synthetic structure. We now have six such ETFs in our benchmark family, including the Horizons US 7-10 Year Treasury Bond ETF (“HTB”) launched in April 2015. Most investment metrics suggest that we could be at or near the end of a five-year “Goldilocks market” — a climate of perpetually higher returns and low volatility. As a firm, we’re generally agnostic on the direction of where capital markets are headed, but we do think it’s fair to say that an unprecedented era of easy returns is over. Since there isn’t a single solution to investment success, we believe that our diverse suite of Canadian ETF solutions offers investors the flexibility to react efficiently to ever-changing market conditions into 2016 and beyond. Of course, you’re not alone in your investment process. I urge you to visit our website at www.horizonsetfs.com, where we offer a range of resources designed to help you become a better ETF investor. Most importantly, it’s our goal to help you find the best ETF solutions for your unique investment needs. Wishing you the best for 2016, Steven J. Hawkins Co-CEO Horizons ETFs Management (Canada) Inc. 87726 - HAP Nexus Hedge.indd 5 2016-03-04 3:57 PM HAP Nexus Hedge Fund Replication Trust MANAGEMENT REPORT OF FUND PERFORMANCE This annual management report of fund performance for HAP Nexus Hedge Fund Replication Trust (the “Fund”) contains financial highlights and is included with the audited annual financial statements for the investment fund. You may request a copy of the Fund’s unaudited interim or audited annual financial statements, interim or annual management report of fund performance, current proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio dis- closures, at no cost, from the Fund’s manager, AlphaPro Management Inc. (“AlphaPro” or the “Manager”), by calling toll free 1-866-641-5739, or locally (416) 933-5745, by writing to us at: 26 Wellington Street East, Suite 700, Toronto ON, M5E 1S2, or by visiting our website at www.horizonsetfs.com or SEDAR at www.sedar.com. This document may contain forward-looking statements relating to anticipated future events, results, circumstances, per- formance, or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, and the effects of competition in the geographic and business areas in which the Fund may in- vest and the risks detailed from time to time in the Fund’s prospectus. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. We caution that the foregoing list of factors is not exhaustive, and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Manager does not under- take, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Management Discussion of Fund Performance Investment Objective and Strategies The Fund’s investment objective is to seek to acquire a currency hedged portfolio of futures contracts, money market instruments, exchange traded funds (“ETFs”) and cash that endeavours to replicate, to the best of its ability, the perfor- mance of the Morningstar Broad Hedge Fund Index (the “Hedge Fund Index”), hedged to the Canadian dollar, net of ex- penses. The Fund does not invest, directly or indirectly, in the constituent hedge funds comprising the Hedge Fund Index. In order to achieve its investment objectives, the Fund seeks to track the performance of the Hedge Fund Index by using the Nexus Hedge Fund Index Replication Strategy (the “Replication Strategy”). The Replication Strategy is a factor-based index replication method which uses statistical models to estimate the net exposure of the Hedge Fund Index’s compo- nents to its main return-generating factors, which usually correspond to the main asset classes available on financial mar- kets. National Bank of Canada (“NBC” or the “Replication Strategy Weightings Provider”) owns rights to use the Replication Strategy which will be implemented by the Fund’s sub-advisor, Fiera Capital Corporation (“Fiera” or the “Sub-Advisor”). The Manager licenses use of the Replication Strategy from NBC. The Fund will use derivatives, including futures contracts and forwards, for hedging purposes. The Fund will be primarily invested in a basket of liquid futures contracts, money market instruments, cash, and, from time to time, ETFs. 1 87726 - HAP Nexus Hedge.indd 1 2016-03-04 3:57 PM HAP Nexus Hedge Fund Replication Trust Management Discussion of Fund Performance (continued) The Morningstar Broad Hedge Fund Index The Hedge Fund Index is a rules-based, asset-weighted index based on the largest and broadest hedge fund database in the hedge fund industry. The Hedge Fund Index is designed to capture the performance and behaviour of the most liquid hedge funds offering exposure to a wide spectrum of core and category hedge fund strategies. The Hedge Fund Index is comprised of between 600 and 800 U.S. based hedge funds from a universe of more than 7,000 single strategy and fund- of-fund hedge funds. Many hedge funds have high initial investment requirements and long hold periods, both of which make it difficult for any investor to purchase and maintain a portfolio that holds all of the hedge funds listed in the Hedge Fund Index. As a result, the Hedge Fund Index is considered to be an un-investible index. Please refer to the Fund’s prospectus and most recent annual information form for a complete explanation of the Fund’s investment restrictions. Risk Investments in the units of the Fund are speculative, involve a degree of risk and are suitable only for persons who are able to assume the risk of losing their entire investment. The Manager, as a summary for existing investors, is providing the list below of the risks to which an investment in the Fund may be subject. Prospective investors should read the Fund’s prospectus and consider the full description of the risks contained therein before subscribing for units. The risks to which an investment in the Fund is subject are listed below and have not changed from the list of risks found in the Fund’s prospectus. A full description of each risk listed below may also be found in the prospectus. The prospectus is available at www.horizonsetfs.com or from www.sedar.com, or by contacting AlphaPro Management Inc.
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