Steben Select Multi-Strategy Fund (“Steben Select” or the “Fund”) is a multi-manager fund of hedge funds providing access to a select set of hedge fund managers. It is built on Steben’s 24-year reputation of manager selection, due diligence and monitoring.
A fund of hedge funds (FoHF) is an investment product that pools investor assets together and invests in multiple hedge funds.
It is a closed end investment management company registered under the Investment Company Act of 1940. It is structured as a Fund and is available to accredited investors only.
The Fund is part of a master-feeder structure and invests in a closed-end, non-diversified, registered investment company (the “Master Fund”). The Master Fund in turn invests in unregistered hedge funds and registered investment companies (“Portfolio Funds”). There can be considerable differences between the Fund and mutual funds. Although the Fund is registered as an investment company, both the Fund and Master Fund have limited liquidity and do not provide daily net asset values.
The Fund’s investment objective is to seek capital appreciation with low long-term correlation to traditional public equity and fixed income markets. The Fund will pursue attractive risk-adjusted returns while attempting to maintain a low correlation to managed futures and Real Estate Investment Trust (REIT) markets. Manager selection will be driven by Steben & Company’s highly experienced research and risk management team using both quantitative and qualitative criteria.
- Diversification across multiple managers, reducing single hedge fund exposure
- Access to top hedge fund managers by pooling investor assets to reach investment minimums
- Quarterly liquidity (See #11 for more details)
- Centralized monthly performance and annual tax reporting
Investing in a single hedge fund, as opposed to a fund of multiple hedge funds, exposes the investor to “single manager risk” i.e., dependency on that individual manager’s ability to deliver returns. While a FoHF is not without significant risks, it does diversify investor assets across multiple managers, therefore reducing single manager risk.
Steben Select is not a hedge fund, but invests in hedge funds. It is a vehicle that offers investors access to hedge funds.
Other differences can include:
- Lower investment minimum than going direct to an individual hedge fund. Pooling of investor assets allows access to managers with investment minimums out of reach of many investors.
- Opportunity for due diligence, risk management, manager selection and rebalancing.
Initially, the Fund will pursue returns in 4 style areas of the hedge fund universe:
- Equity Long/Short
- Quantitative Equity Market Neutral
- Global Macro
- Fixed Income Relative Value
For more detailed information on what these styles are, we invite you to read our educational guide: Hedge Funds: An Introduction
There are many different types of hedge fund investments available in the marketplace today. They range from single hedge fund investments, to funds of hedge funds, to hedge fund replication strategies. The particular types of vehicles include unregistered investment companies, closed-end registered investment companies, mutual funds and exchange traded funds (ETFs).
Steben Select Fund is a fund of hedge funds. Funds of funds typically have more manager diversification than individual hedge funds. They invest in multiple hedge funds whose managers seek to potentially generate profit through their skill in active portfolio management. In contrast, hedge fund replication strategies are typically rules-based trading systems which attempt to mimic the risk profile of hedge fund indices and earn a return from the market risk premium associated with taking those risks. By definition, replication strategies have no “manager skill” and hence have no opportunity to earn excess profits above market risk premia through skill-based security selection or market timing which actual hedge fund managers attempt to do. However, replication strategies typically charge lower fees than hedge funds or fund of hedge funds.
Steben Select is a closed-end investment management company registered under the Investment Company Act of 1940. Registered funds of hedge funds are generally available only to accredited investors. Mutual funds and ETFs are typically available to any investor. Mutual funds and ETF structures have daily liquidity, but this can limit the number of hedge fund strategies to only those which can be managed with daily liquidity. It also constrains the universe of potential managers to those who are able or willing to accept daily redemptions from clients. Many hedge fund managers are unwilling to offer daily liquidity because of the disruption it causes to their trading strategies. Thus, funds of hedge funds in an unregistered or closed-end investment company format, who may offer quarterly liquidity, can access a much larger universe of hedge fund managers than mutual funds or ETFs.
As of March 2018, Steben Select currently invests with nine (9) managers. A 2013 Goldman Sachs Hedge Fund survey found that 54% of Funds of Hedge Funds had over 30 managers. So besides the low beta and correlation goals, Steben Select Fund invests in fewer hedge funds than the average FoHF. We believe that a smaller set of carefully selected managers can potentially better balance risk and return characteristics, and that excessive manager diversification can dilute the pool of talent in the portfolio.
Stocks and bonds are types of assets, while hedge funds are a type of investing vehicle. While a mutual fund can invest in stocks or bonds, the same is true for a hedge fund. Hedge funds pool investor assets together and invest in a variety of assets, including stocks and bonds.
The significant and important difference is that stock and bond mutual funds generally fall into the “long-only” investment category, and most hedge funds fall into the alternative investment category. Most hedge funds are “unconstrained”, and do not need to adhere to any benchmark. Simply stated, they can attempt to pursue absolute returns, seeking gains in both rising and falling markets through long and short positions.
A traditional stock or bond investment is reliant on the market rising (including dividends and interest payments received) to achieve profits. Likewise, mutual funds pursuing returns in the equity and fixed income markets are typically “long only”, meaning they tend to make money when the market rises.
Although there are many types of hedge fund styles, most pursue their returns across a broader range of investments: including stocks, bonds, commodities, currency, and other global markets. They are free to pursue returns by not only buying “long” positions they expect to rise in value, but also selling “short” investments expected to fall in value. Being both long and short at the same time creates a type of “hedge” (hence the name hedge funds) and allows for the potential to profit when prices are both rising or falling.
Although most hedge funds have historically had lower volatility than the S&P 500, it is important to keep in mind that most hedge funds are considered riskier than individual investment grade bonds and indexed equity portfolios. Due to their diversification, funds of hedge funds typically have lower volatility than most individual hedge funds.
We believe the Fund may be appropriate for high net worth investors seeking capital appreciation, who have a long-term time horizon and can bear the loss of some or all of their investment and/or the risks associated with a lack of liquidity.
Steben Select is for accredited investors only. Accredited investors must meet certain income and/or net worth thresholds.
Hedge funds can be thought of as components of existing asset class allocations. For instance, a long/short equity hedge fund could be included within an equity allocation, or a relative value fixed income hedge fund could be included within a fixed income allocation. Hedge funds can also be thought of as an investment that potentially captures different sources of return from traditional investments and could be a separate allocation as part of an overall allocation to alternative investments. This is especially relevant for strategies that invest in multiple asset classes, such as global macro. But keep in mind that the Fund may be highly leveraged and may increase the potential for losses and gains.
Narrowing the potential universe of over 10,000 hedge funds to the select list of managers in the Fund is conducted by Steben & Company’s highly qualified research and risk management team.
The selection process is both quantitative and qualitative. The quantitative screen reduces the number of potential candidates to around 30 to 50 funds. This screen includes searching for managers with a track record of at least 4 years, assets under management of over $100mm, a low beta to equity indices, and a low correlation to fixed income, real estate investment trust (REIT) and managed futures indices. Steben also screens for historically attractive risk adjusted return attributes. Steben then conducts qualitative due diligence — investment and operational — to further narrow the list to the select number of funds chosen.
The Fund intends to offer quarterly share repurchases through tender offers with 75 days written notice. An initial payment of 95% of the share price will be paid approximately 35 days after quarter end, with the remaining 5% paid once the annual audit is completed.
Share repurchases within the first 9 months of investing will incur an early withdrawal penalty of 2%. The penalty goes to the Fund and serves to offset the impact on other Fund investors of penalties imposed from withdrawals of investments in the sub funds through the Master Fund.
Steben Select Fund is not a mutual fund. It is a closed-end investment management company registered under the Investment Company Act of 1940. The Fund invests in the Master Fund, which allocates its assets among a number of hedge funds.
Steben Select charges the following fees:
- Management Fee: 1.25%
- Operating Expenses: 0.45%
- Servicing Fee: 0.25%
- Early Withdrawal Fee: 2% within first 9 months (see #11 for more information)
In addition to the management fee, the Fund will also bear the management and incentive fees charged by the underlying hedge funds, estimated at 7.31% per year. This figure is estimated by incorporating actual historical management fees and fund expenses and by applying actual incentive fee rates to the realized fund performance as included in the audited financial statements (March 2018) for each of the Portfolio Funds in which the Master Fund intends to invest. Actual such amounts incurred by the Master Fund may be substantially higher or lower because the performance of the Portfolio Funds, and hence their incentive fees may fluctuate, and the Master Fund may invest in different Portfolio Funds from time to time. These fees are not subject to any fee cap or the operating expense agreement with the investment manager, Steben & Company.
Steben is the Investment Manager and is responsible for the selection, due diligence and oversight of the hedge fund managers. Steben can increase or reduce the allocation to any of the hedge fund managers or hedge funds at any time and may withdraw from any of these funds or managers at any given time. Steben also oversees the delivery of performance reporting, regular fund updates, and tax reporting information.
The Fund may only be sold to accredited investors, which are investors who meet certain minimum annual income or net worth thresholds. The Fund is speculative and an investment in the Fund involves substantial risks. Investors should be able to bear the loss of their investment.
Prior to investing in the Fund, all investors should carefully read the prospectus, after which, the investor application is to be completed and sent to US Bancorp along with the initial investment amount. Applications may be submitted to, and are received by, the Fund throughout any given month, but are accepted at the same time once per month. Investor applications should be received by the Fund 8 business days prior to month end. Cleared funds must be in the Fund’s account five business days prior (checks received 8 business days prior) to the last business day of the month.
All applications and related documents will be returned if not accepted. Checks should be made payable to “Steben Select Multi-Strategy Fund.”
Please see the Investor Application for contact instructions.
An investor can invest directly with the Fund but we encourage investors to consult their financial advisor in order to determine if the Fund is suitable inside their investment portfolio.
Investors, through the Fund’s administrator, US Bancorp, will receive a monthly statement. In addition, investors in the Fund through a financial advisor with a custodian will receive the Fund’s estimated NAV on their monthly brokerage statements.
Steben intends to provide monthly performance commentary approximately 4 weeks after month end. Estimated performance should be available within a week of month end.
Since 1989, Steben has specialized in screening and selecting investment managers – in fact we pioneered bringing multi-manager alternative investment funds to the independent advisor. Our flagship fund has operated continuously since 1990. Our deeply experienced research and risk management team is responsible for running the quantitative and qualitative screening process to cull the universe of potential managers down to the select few who we invest with. This team brings extensive due diligence and audit experience from such firms as Merrill Lynch, FRM/Man and Ernst & Young.