[Federal Register Volume 85, Number 149 (Monday, August 3, 2020)]
[Notices]
[Pages 46744-46746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16712]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-5552/File No. 803-00250]


Blackstone Alternative Investment Funds; Blackstone Alternative 
Investment Advisors LLC

July 28, 2020.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice.

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    Notice of application for an exemptive order under Section 206A of 
the Investment Advisers Act of 1940 (``Advisers Act'').

Applicants:  Blackstone Alternative Investment Funds (the ``Trust'') 
and Blackstone Alternative Investment Advisors LLC (``BAIA'' or the 
``Adviser'') (together, the ``Applicants'').

Relevant Advisers Act Sections:  Exemption requested under Section 206A 
of the Advisers Act for an exemption from Section 205 of the Advisers 
Act and rule 205-1 thereunder.

Summary of Application:  Applicants request that the Commission issue 
an order permitting the Adviser to enter into or amend an investment 
sub-advisory agreement (each, a ``Sub-Advisory Agreement'' and 
collectively, the ``Sub-Advisory Agreements'') with a sub-adviser 
(each, a ``Sub-Adviser'') under which the Sub-Adviser would receive an 
investment sub-advisory fee from the Adviser where such fee would (i) 
be calculated based on the performance of the portion of a Fund's (as 
defined below) assets allocated to the Sub-Adviser (an ``Allocated 
Portion'') measured by the change in the Allocated Portion's gross 
asset value, rather than the change in net asset value of the Allocated 
Portion and (ii) apply only to the Allocated Portion and not to a Fund 
as a whole.

Filing Dates:  The application was filed on June 24, 2019, and amended 
and restated on April 28, 2020 and July 21, 2020.

Hearing or Notification of Hearing:  An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by emailing the Commission's Secretary at 
Secretarys-Office@sec.gov and serving Applicants with copies of the 
request by email. Hearing requests should be received by the Commission 
by 5:30 p.m. on August 24, 2020, and should be accompanied by proof of 
service on Applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Advisers Act, 
hearing requests should state the nature of the writer's interest, any 
facts bearing upon the desirability of a hearing on the matter, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by emailing the Commission's Secretary at 
Secretarys-Office@sec.gov.

ADDRESSES: The Commission: Secretarys-Office@sec.gov. Applicants: 
Blackstone Alternative Investment Advisors LLC, 
james.hannigan@blackstone.com and 234846554a4d0d4e4a404b464f63414f42404850574c4d460d404c4e; Simpson 
Thacher & Bartlett LLP, ryan.brizek@stblaw.com and 
patrick.quinn@stblaw.com.

FOR FURTHER INFORMATION CONTACT: Erin Loomis Moore, Senior Counsel, at 
(202) 551-6721, or Parisa Haghshenas, Branch Chief, at (202) 551-6723 
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website at http://www.sec.gov/rules/iareleases.shtml or by 
calling (202) 551-8090.

Applicant's Representations

    1. The Trust is organized as a Massachusetts business trust and is 
registered with the Commission as an open-end management investment 
company under the Investment Company Act of 1940 (``1940 Act''). The 
Trust currently consists of one Fund, Blackstone Alternative Multi-
Strategy Fund, which operates under a multi-manager structure and is 
offered and sold pursuant to a registration statement on Form N-1A. 
Applicants request that the relief apply to Applicants, as well as to 
any existing or future series of the Trust, and any other existing or 
future registered management investment company or series thereof that 
intends to rely on the requested order in the future and that is 
managed by the

[[Page 46745]]

Adviser \1\ (each, a ``Fund,'' and collectively, the ``Funds'').\2\
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    \1\ The term ``Adviser'' includes (i) the Adviser or its 
successors and (ii) any entity controlling, controlled by, or under 
common control with, the Adviser or its successors. For the purposes 
of the requested order, ``successor'' is limited to an entity 
resulting from a reorganization into another jurisdiction or a 
change in the type of business organization.
    \2\ All registered investment companies that currently intend to 
rely on the requested order are named as applicants. All Funds that 
currently intend to rely on the requested order are identified in 
the application. Any entity that relies on the requested order will 
do so only in accordance with the terms and conditions contained in 
the application.
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    2. BAIA is a limited liability company organized under the laws of 
the State of Delaware and is registered with the Commission as an 
investment adviser under the Advisers Act. The Adviser is an indirect, 
wholly-owned subsidiary of The Blackstone Group Inc. BAIA serves, and 
each other Adviser will serve, as the investment adviser to each Fund 
pursuant to an investment advisory agreement with the Trust 
(``Investment Management Agreement''). Pursuant to the terms of the 
Investment Management Agreement, the Adviser, subject to the 
supervision of the board of trustees of the Trust (``Board''), provides 
investment management services to the Fund. The Investment Management 
Agreement provides that the Adviser may, subject to the approval of the 
Board, including a majority of the Independent Board Members,\3\ and 
the shareholders of the applicable Fund (if required), delegate 
portfolio management responsibilities of all or a portion of the assets 
of a Fund to one or more Sub-Advisers.\4\ Any future Adviser will be 
registered with the Commission as an investment adviser under the 
Advisers Act. Future Advisers will comply with the terms of any order 
issued by the Commission in connection with the application or 
subsequent relief or rules, as applicable.
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    \3\ The term ``Independent Board Members'' means those board 
members who are not ``interested persons'' of the Fund or the 
Adviser, as defined in Section 2(a)(19) of the 1940 Act. A Fund 
would not seek shareholder approval of the Sub-Advisory Agreement 
because the Applicants currently rely on a multi-manager exemptive 
order to enter into and materially amend Sub-Advisory Agreements 
without obtaining shareholder approval. See Blackstone Alternative 
Investment Funds, et al., Investment Company Act Release Nos. 32481 
(Feb. 16, 2017) (notice) and 32530 (Mar. 13, 2017) (order). In the 
future, the Adviser, a Sub-Adviser and a Fund may rely on an amended 
version of this multi-manager exemptive order or substantially 
similar relief.
    \4\ The term ``Sub-Adviser'' also applies to any Sub-Adviser to 
any wholly-owned subsidiary, as defined in the 1940 Act, of a Fund 
(each, a ``Subsidiary'' and collectively, the ``Subsidiaries''). The 
Adviser will serve as investment adviser to each Subsidiary and may 
retain one or more Sub-Advisers to manage or provide investment 
recommendation(s) with respect to the assets of a Subsidiary. 
Applicants also request relief with respect to any Sub-Advisers who 
serve as Sub-Advisers to a Subsidiary. Where appropriate, 
Subsidiaries are also included in the term ``Fund.''
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    3. Pursuant to the authority under an Investment Management 
Agreement, the Adviser may enter into Sub-Advisory Agreements with 
various Sub-Advisers on behalf of a Fund. The Adviser will negotiate 
and renegotiate the terms of the Sub-Advisory Agreements with the Sub-
Advisers, including the fees paid to the Sub-Advisers, and will make 
recommendations to the Board as needed.
    4. Each Sub-Adviser is or will be responsible for the discretionary 
management of, or for providing non-discretionary advice with respect 
to, its Allocated Portion of a Fund's assets on a day-to-day basis. In 
doing so, the Sub-Advisers act for all practical purposes as though 
each were advising a separate investment company. For example, each 
Sub-Adviser receives position-level portfolio information for its 
Allocated Portion, not for the Fund as a whole, on a daily basis and is 
responsible for compliance monitoring only with respect to the 
guidelines of its Allocated Portion. In addition, each Sub-Adviser is 
responsible for preparing information for the Adviser and the Board 
only with respect to its Allocated Portion. Each Sub-Adviser will be an 
``investment adviser'' to the Fund within the meaning of Section 
2(a)(20) of the 1940 Act and will provide investment management 
services to its Allocated Portion of a Fund.\5\ Each Sub-Adviser 
receives separate compensation for its portfolio management services 
directly from the Adviser.
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    \5\ Each Sub-Adviser and any future Sub-Adviser would be 
registered with the Commission as an investment adviser under the 
Advisers Act or not subject to such registration. Each Sub-Adviser 
and any future Sub-Adviser will comply with the terms and conditions 
contained in the application.
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    5. Applicants represent that (i) neither the Sub-Adviser nor any of 
its affiliates will have sponsored or organized the Trust or will serve 
as a distributor or principal underwriter of the Trust; (ii) neither 
the Sub-Adviser nor any of its affiliates will own any shares issued by 
the Trust; (iii) no officer, director or employee of the Sub-Adviser, 
nor of its affiliates, will serve as an executive officer or trustee of 
the Trust; and (iv) neither the Sub-Adviser nor any of its affiliates 
will be an affiliated person of the Adviser or any other person who 
provides investment advice with respect to the Trust's advisory 
relationships (except to the extent that such affiliation may exist by 
reason of the Sub-Adviser or any of its affiliates serving as 
investment adviser to the Fund). Services provided by the Sub-Advisers 
are limited to investment selection, placement of transactions for 
execution and certain compliance functions directly related to such 
services.
    6. The terms of each Sub-Advisory Agreement or amendment thereto 
(the ``Performance Fee Terms'') will be approved by the Board, 
including a majority of the Independent Board Members. The Performance 
Fee Terms contemplate a fee arrangement, commonly referred to as a 
``fulcrum fee'' (the ``Proposed Fulcrum Fee'') designed to reward a 
Sub-Adviser for performance of the Allocated Portion that exceeds the 
total return of an index plus an additional hurdle rate and to reduce 
the Sub-Adviser's compensation with respect to periods during which 
lesser performance is achieved.\6\ Since the Proposed Fulcrum Fee would 
be paid by the Adviser to a Sub-Adviser, there would be no increase in 
advisory fee rates charged to a Fund and its shareholders.
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    \6\ Each Sub-Adviser manages a sub-strategy of a Fund. As a 
result, different Sub-Advisers will manage their Allocated Portion 
to seek to exceed the performance of different indices, which can 
and will differ from a Fund's benchmark index.
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    7. The Proposed Fulcrum Fee has two separate components: a base fee 
calculated as a percentage of the average daily net assets of the 
Allocated Portion (``Base Fee'') and a performance component adjustment 
to the Base Fee (``Performance Component''). The Performance Component 
would be based on a percentage of the difference between (i) the total 
return of the Allocated Portion during the preceding specified period 
calculated without regard to the expenses incurred in the operation of 
the Allocated Portion, including the management fees, distribution and/
or service fees and certain other operating expenses, even if 
attributable to the Allocated Portion (``Gross Total Return''), and 
(ii) the total return of an index during the same specified period plus 
a performance hurdle. Both the percentage on which the Performance 
Component is based and the specified period may vary among Sub-
Advisers.
    8. None of the costs and expenses of the Fund that apply generally 
across the Fund's portfolio would be deducted from the Gross Total 
Return of the Allocated Portion. Gross Total Return would, however, 
reflect the effect (i.e., reducing performance) of all applicable 
brokerage and transaction costs directly attributable to the Allocated 
Portion.

Applicants' Legal Analysis

    1. Section 205(a)(1) of the Advisers Act generally prohibits an 
investment

[[Page 46746]]

adviser from entering into any investment advisory agreement that 
provides for compensation to the adviser on the basis of a share of 
capital gains or capital appreciation of a client's account.
    2. Section 205(b) of the Advisers Act provides a limited exception 
to this prohibition, permitting an adviser to charge a registered 
investment company and certain other persons a fee that is based on 
asset value of the company or fund under management averaged over a 
specified period and increases and decreases ``proportionately with the 
investment performance of the company or fund over a specified period 
in relation to the investment record of an appropriate index of 
securities prices or such other measure of investment performance as 
the Commission by rule, regulation or order may specify.''
    3. Rule 205-1 under the Advisers Act requires that the investment 
performance of an investment company be computed based on the change in 
the net (of all expenses and fees) asset value per share of the 
investment company.
    4. Applicants request exemptive relief from Section 205 of the 
Advisers Act and rule 205-1 thereunder to the extent necessary to 
permit the Adviser to enter into and amend Sub-Advisory Agreements to 
provide for the payment by the Adviser to a Sub-Adviser of performance-
based compensation under which the Sub-Adviser's fee would (i) be 
calculated based on the performance of the Allocated Portion measured 
by the change in the Allocated Portion's gross asset value, rather than 
the change in net asset value of the Allocated Portion, and (ii) apply 
only to the Allocated Portion and not to the Fund as a whole.
    5. Applicants state that Congress, in adopting and amending Section 
205 of the Advisers Act, and the SEC, in adopting rule 205-1, put into 
place safeguards designed to ensure that investment advisers would not 
take advantage of advisory clients.
    6. Applicants assert that the Commission required that performance 
fees be calculated based on the net asset value of the investment 
company's shares to prevent a situation where an adviser could earn a 
performance fee even though investment company shareholders did not 
derive any benefit from the adviser's performance after the deduction 
of fees and expenses.
    7. Applicants state that the Proposed Fulcrum Fee would be fair to 
each Fund and its shareholders because the fee will be paid by the 
Adviser and not borne by shareholders as an expense of the Fund out of 
the assets of the Fund. In addition, the fee formula will include a 
performance hurdle that the Sub-Adviser must meet before earning the 
Performance Component of the Proposed Fulcrum Fee. In the event the 
Base Fee changes, the performance hurdle also would be changed to the 
extent necessary to be at least equal to the Base Fee. Further, the 
Sub-Adviser would not earn any performance-based fee until a Fund has 
derived the benefit of the Allocated Portion's performance.
    8. Applicants suggest that Congress' concern, in enacting the 
safeguards of Section 205, came about because the vast majority of 
investment advisers exercised a high level of control over the 
structuring of the advisory relationship. Applicants state that the 
Proposed Fulcrum Fee will be the result of arm's length negotiations 
between a Sub-Adviser and the Adviser and the Board will approval each 
Proposed Fulcrum Fee. Applicants state that the Sub-Adviser has no 
influence over the overall management of the Trust or the Fund beyond 
the investment selection process for its Allocated Portion. Management 
functions of the Trust and the Fund reside in the Board and the 
Adviser. The Proposed Fulcrum Fee will be paid by the Adviser to the 
Sub-Adviser and its imposition will not increase advisory fees payable 
by the Fund. The Proposed Fulcrum Fee requires the performance of the 
Allocated Portion to both match the index and exceed a performance 
hurdle before the Sub-Adviser is entitled to receive any performance-
based component of its fee. Applicants represent that the Trust itself, 
acting through its Board and its officers, is directly and fully 
responsible for supervising the Trust's service providers (including 
the Sub-Advisers) and monitoring the operating expenses of each of the 
Funds. In addition, for those Funds, including Blackstone Alternative 
Multi-Strategy Fund, which are served by more than one Sub-Adviser, the 
Adviser is responsible for allocating the assets of the Fund among such 
Sub-Advisers. Finally, the Board, at the Adviser's recommendation, is 
responsible for any decision to hire or fire any Sub-Adviser.
    9. Applicants state that the Adviser was and is on equal footing 
with the Sub-Adviser with respect to the negotiation of the Proposed 
Fulcrum Fee. Moreover, the Sub-Adviser will receive its sub-advisory 
fee from the Adviser and not from a Fund, meaning that the requested 
relief would not cause the advisory fee rates charged to a Fund to 
increase. Applicants argue that as a result, a Fund does not need the 
protections afforded by calculating the Proposed Fulcrum Fee based on 
net assets. Applicants submit that the Proposed Fulcrum Fee is 
therefore consistent with the underlying policies of Section 205 and 
rule 205-1 under the Advisers Act and that the exemption would be 
consistent with the protection of investors.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Management fees charged to a Fund will not increase as a result 
of calculating the investment sub-advisory fee based on Gross Total 
Return.
    2. The adoption of the Proposed Fulcrum Fee will not cause the 
Adviser or a Sub-Adviser to reduce or modify in any way the nature and 
level of its services with respect to a Fund.
    3. The investment sub-advisory fee will be negotiated between the 
Sub-Adviser and the Adviser.
    4. The fee structure will contain a hurdle that is no lower than 
the Base Fee and, should the Base Fee change, the hurdle will also be 
changed to the extent necessary to be at least equal to the Base Fee. 
The fee structure will ensure that the investment sub-advisory fee 
continues to have the potential to increase and decrease 
proportionally.
    5. Applicants will comply with all other provisions of Section 205 
and rules 205-1 and 205-2 under the Advisers Act with respect to the 
Proposed Fulcrum Fee arrangement between the Adviser and a Sub-Adviser 
and to future arrangements.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16712 Filed 7-31-20; 8:45 am]
BILLING CODE 8011-01-P


