Steben Select Multi-Strategy Master Fund (the “Master Fund”) is a newly-formed Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified closed-end management investment company and serves as a master fund in a master-feeder structure. Steben Select Multi-Strategy Fund serves as a feeder fund in the master-feeder structure. The Master Fund has authorized unlimited common shares of beneficial interest (“Shares”), which may be issued in more than one class or series. Shares in the Master Fund are issued solely in private placement transactions that do not involve any “public offering” within the meaning of Section 4(2) of, and/or Regulation D under the Securities Act of 1933 (“Securities Act”). Investments in the Master Fund generally may be made only by U.S. and foreign investment companies or other investment vehicles that include persons who are “accredited investors” (“Shareholders”), as defined in Regulation D under the Securities Act.
The Master Fund’s investment objective is to seek capital appreciation with low long-term correlation to traditional public equity and fixed income markets. The Master Fund is a “fund of funds” and seeks to achieve its investment objective, primarily by allocating its assets, directly or indirectly, among investment partnerships, managed funds, securities, swaps and other assets held in segregated accounts and other investment funds, which may include investment funds commonly referred to as hedge funds, (collectively, “Portfolio Funds”) that are managed by third-party investment managers (“Portfolio Fund Managers”) that employ a variety of alternative investment strategies.
The Board of Trustees (the “Board” and each member a “Trustee”) is authorized to engage an investment adviser and it has selected Steben & Company, Inc. (the “Investment Manager”), to manage and oversee the Master Fund’s portfolio and operations, pursuant to an investment management agreement (the “Investment Management Agreement”). The Investment Manager is a Maryland corporation that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and is registered with the Commodity Futures Trading Commission (the “CFTC”) as a commodity pool operator and a swap firm, and is a member of the National Futures Association as well as with the Securities and Exchange Commission (the “SEC”) as a broker-dealer. Under the Investment Management Agreement, the Investment Manager is responsible for developing, implementing, and supervising the Master Fund’s investment program subject to the supervision of the Board.
Under the Master Fund’s organizational documents, the Master Fund’s Trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to the Master Fund. In the normal course of business, the Master Fund enters into contracts with service providers, which also provide for indemnifications by the Master Fund. The Master Fund’s maximum exposure under these arrangements is unknown, as this would involve any future potential claims that may be made against the Master Fund.
| (2) | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES |
The accounting and reporting policies of the Master Fund conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The Master Fund is an investment company and
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Notes to Financial Statements (continued)
March 31, 2014
follows accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services-Investment Companies”.
Share Valuation
The Master Fund will calculate its Net Asset Value (“NAV”) as of the close of regular trading on the New York Stock Exchange (ordinarily 4:00 P.M.) on the last business day of each calendar month and such other dates as the Board may determine, including in connection with repurchase of Shares, in accordance with the procedures and policies established by the Board. The NAV of the Master Fund will equal the value of the total assets of the Master Fund, less all of its liabilities, including accrued fees and expenses.
Investment Valuation
The Investment Manager’s Valuation Committee implements the valuation of the Master Fund’s investments, including interests in the Portfolio Funds, in accordance with written policies and procedures (the “Valuation Procedures”) that the Board of the Master Fund has approved for purposes of determining the value of securities held by the Master Fund, including the fair value of the Master Fund’s investments in Portfolio Funds. The Investment Manager’s Valuation Committee consists of members of the Board, additional officers of the Master Fund, and one or more representatives of the Investment Manager.
Investments are carried at fair value. As a general matter, the fair value of the Master Fund’s investment in a Portfolio Fund represents the amount that the Master Fund can reasonably expect to receive if the Master Fund’s investment was sold at its reported NAV. Determination of fair value involves subjective judgment and amounts ultimately realized may vary from estimated values. The fair value of the Portfolio Funds has been estimated using the NAV as reported by the Portfolio Fund Managers of the respective Portfolio Funds. FASB guidance provides for the use of NAV as a “Practical Expedient” for estimating fair value of the Portfolio Funds. NAV reported by each Portfolio Fund is used as a practical expedient to estimate the fair value of the Master Fund’s interest therein and their classification within Level 2 or 3 is based on the Master Fund’s ability to redeem its interest in the near term and liquidate the underlying portfolios.
Certain securities and other financial instruments in which the Portfolio Funds invest may not have readily ascertainable market prices and will be valued by the Portfolio Fund Managers. Such valuations generally will be conclusive with respect to the Master Fund, even though a Portfolio Fund Manager may face a conflict of interest in valuing the securities, as their value will impact the Portfolio Fund Manager’s compensation. Generally, neither the Investment Manager nor the Board will be able to confirm independently the accuracy of the valuations made by the Portfolio Fund Managers. The net asset values or other valuation information received by the Investment Manager from the Portfolio Funds will typically be estimates only, subject to revision through the end of each Portfolio Fund’s annual audit. The valuations reported by the Portfolio Fund Managers, upon which the Master Fund will calculate its NAV, may be subject to later adjustment based on information reasonably available at that time. To the extent that subsequently adjusted valuations or revisions to Portfolio Fund net asset values adversely affect the Master Fund’s NAV, the outstanding Shares of the Master Fund will be adversely affected by prior repurchases to the benefit of Shareholders who previously had Shares repurchased at a NAV per share higher than the adjusted amount. Conversely, any increases in the net asset value resulting from such subsequently adjusted valuations will be entirely for the benefit of the outstanding Shares and to the detriment of Shareholders who previously had Shares repurchased at a NAV per share lower than the adjusted amount.
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Notes to Financial Statements (continued)
March 31, 2014
Under the Valuation Procedures, if the Master Fund, acting reasonably and in good faith, determines that a Portfolio Fund Manager cannot provide valuation of a Portfolio Fund or if the Master Fund determines that the valuation provided by a Portfolio Fund Manager does not represent the fair value of the Master Fund’s interest in a Portfolio Fund, the Master Fund may utilize any other reasonable valuation methodology to determine the fair value of the Portfolio Fund. Although redemptions of interests in Portfolio Funds normally are subject to advance notice requirements, Portfolio Funds typically will make available NAV information to holders representing the price at which, even in the absence of redemption activity, the Portfolio Fund would have effected a redemption if any such requests had been timely made or if, in accordance with the terms of the Portfolio Fund’s governing documents, it would be necessary to effect a mandatory redemption. In the absence of specific transaction activity in interests in a particular Portfolio Fund, the Master Fund would consider whether it was appropriate, in light of all relevant circumstances, to value such a position at its NAV as reported by the Portfolio Fund, or whether to adjust such value to reflect a premium or discount to such NAV.
In making a fair value determination, the Master Fund will consider all appropriate information reasonably available to it at the time and that the Investment Manager believes to be reliable. The Master Fund may consider factors such as, among others: (i) the price at which recent purchases for or redemptions of the Portfolio Fund’s interests were effected; (ii) information provided to the Master Fund by a Portfolio Fund Manager, or the failure to provide such information as the Portfolio Fund Manager agreed to provide in the Portfolio Fund’s offering materials or other agreements with the Master Fund; (iii) relevant news and other sources; and (iv) market events. In addition, when a Portfolio Fund imposes extraordinary restrictions on redemptions, or when there have been no recent subscriptions for Portfolio Fund interests, the Master Fund may determine that it is appropriate to apply a discount to the NAV reported by the Portfolio Fund. The Board reviews all valuation adjustments, which would be undertaken pursuant to the Board-approved policy and procedures.
To the extent that the Investment Manager invests the assets of the Master Fund in securities or other instruments that are not investments in Portfolio Funds (e.g., directly or through separate accounts), the Master Fund will generally value such assets as described below. Securities traded: (1) on one or more of the U.S. national securities exchanges or the OTC Bulletin Board will be valued at their last sales price; and (2) on the NASDAQ Stock Market will be valued at the NASDAQ Official Closing Price (“NOCP”), at the close of trading on the exchanges or markets where such securities are traded for the business day as of which such value is being determined. Securities traded on the NASDAQ Stock Market for which the NOCP is not available will be valued at the mean between the closing bid and asked prices in this market. Securities traded on a foreign securities exchange will generally be valued at their closing prices on the exchange where such securities are primarily traded and such valuations translated into U.S. dollars at the current exchange rate. If an event occurs between the close of the foreign exchange and the computation of the Master Fund’s NAV that would materially affect the value of the security, the value of such security will be adjusted to its fair value. Except as specified above, the value of a security, derivative, or synthetic security that is not actively traded on an exchange shall be determined by an unaffiliated pricing service that may use actual trade data or procedures using market indices, matrices, yield curves, specific trading characteristics of certain groups of securities, pricing models, or combinations of these. The Investment Manager’s Valuation Committee will monitor the value assigned to each security by the pricing service to determine if it believes the value assigned to a security is correct. If the Investment Manager’s Valuation Committee believes that the value received from the pricing service is incorrect, then the value of the security will be its fair value as determined in accordance with the Valuation Procedures.
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Notes to Financial Statements (continued)
March 31, 2014
On August 13, 2013, the CFTC adopted rules to harmonize conflicting SEC and CFTC disclosure, reporting and recordkeeping requirements for registered investment companies that do not meet an exemption from the definition of commodity pool. The harmonization rules provide that the CFTC will accept the SEC’s disclosure, reporting, and recordkeeping regime as substituted compliance for substantially all of the otherwise applicable CFTC regulations as long as such investment companies meet the applicable SEC requirements.
Previously, in November 2012, the CFTC issued relief for fund of fund operators, including advisers to registered investment companies that may otherwise be required to register with the CFTC as commodity pool operators but do not have access to information from the investment funds in which they are invested in order to determine whether such registration is required. This relief delayed the registration date for such operators until the later of June 30, 2013 or six months from the date the CFTC issues revised guidance on the application of certain thresholds with respect to investments in commodities held by funds of funds.
In July 2013, the Investment Manager claimed no-action relief from the CFTC registration with respect to its operation of the Master Fund. Although the CFTC now has adopted harmonization rules applicable to investment companies that are deemed to be commodity pools, the CFTC has not yet issued guidance on how funds of funds are to determine whether they are deemed to be commodity pools. As of March 31, 2014, the Master Fund is not considered a commodity pool and continues to rely on the fund of fund no-action relief.
The Master Fund considers all unpledged temporary cash investments of sufficient credit quality with a maturity date at the time of purchase of three months or less to be cash equivalents. The Master Fund considers U.S. regulated money market funds to be cash equivalents.
| (e) | SECURITY TRANSACTIONS AND INVESTMENT INCOME RECOGNITION |
Purchases and sales of securities are recorded on a trade-date basis. For investments in securities interest income is recorded on the accrual basis and dividends are recorded on the ex-dividend date. Realized gains or losses on the disposition of investments are accounted for based on the specific identification method. Investments that are held by the Master Fund are marked to fair value at the date of the financial statements, and the corresponding change in unrealized appreciation/depreciation is included in the Statement of Operations.
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Notes to Financial Statements (continued)
March 31, 2014
The Master Fund intends to continue to qualify as a Regulated Investment Company (“RIC”) by complying with the provisions available to certain investment companies, as defined in Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and to make distributions from net investment income and from net realized capital gains sufficient to relieve it from all, or substantially all, federal income and excise taxes. Investments in foreign securities may result in foreign taxes being withheld by the issuer of such securities.
The Master Fund has a tax year end of October 31st.
The Master Fund has adopted financial reporting rules regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. Management has reviewed all open tax years and major jurisdictions and concluded that no provision for income tax would be required in the Master Fund’s financial statements. The Master Fund’s Federal and state income and Federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
As of October 31, 2013, the tax cost of securities and components of distributable earnings on a tax basis were as follows:
| Cost basis of investments for federal | | | |
| income tax purposes | | $ | 6,267,031 | |
| Gross tax unrealized appreciation | | | 112,959 | |
| Gross tax unrealized depreciation | | | (16,087 | ) |
| Net tax unrealized appreciation | | | 96,872 | |
| Undistributed ordinary income | | | 48,719 | |
| Total distributable earnings | | $ | 145,591 | |
At October 31, 2013, the Master Fund had no capital loss carry forwards.
Under current law, capital losses and specified ordinary losses realized after October 31 and non-specified ordinary losses incurred after December 31 (ordinary losses collectively known as “qualified late year ordinary loss”) may be deferred and treated as occurring on the first business day of the following fiscal year.
The Master Fund had no deferred losses at October 31, 2013.
The Master Fund made no distributions since the commencement of operations on August 1, 2013 through October 31, 2013.
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Notes to Financial Statements (continued)
March 31, 2014
The preparation of the financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates and such differences may be significant.
(h) | ORGANIZATION AND OFFERING COSTS |
Organizational expenses consist primarily of costs to establish the Master Fund and enable it to legally conduct business. Under an operating services agreement (the “Operating Services Agreement”), the Investment Manager shall pay all expenses incurred by the Master Fund in connection with the organization and offering of Shares of the Master Fund. These expenses may not be recouped by the Investment Manager.
Pursuant to the Operating Services Agreement with the Master Fund, the Investment Manager has contractually agreed to pay all of the Master Fund’s ordinary operating expenses so long as Steben & Company, Inc. remains the Investment Manager, including the Master Fund’s organizational and offering expenses but not the following Master Fund expenses: the Management Fee, borrowing costs, interest expenses, brokerage commissions and other transaction and investment-related costs, portfolio fund and portfolio fund manager fees and expenses, taxes and governmental fees, acquired fund fees and expenses, shareholder servicing fees, litigation and indemnification expenses, judgments and other extraordinary expenses not incurred in the ordinary course of the Master Fund’s business. The Operating Services Agreement may be terminated at any time by the Board or upon 60 days written notice by the Master Fund or the Investment Manager. See Note 6 – Related Party Transactions.
U.S. Bancorp Fund Services, LLC provides accounting, administrative and transfer agency services to the Master Fund. U.S. Bank, N.A. provides custodian services to the Master Fund.
Issuance of Shares
All purchases accepted by the Master Fund are accepted at the end of the month, and the NAV of Shares is determined as of the close of business on the last day of that month. Purchases accepted by the Master Fund become effective as of the opening of business on the first calendar day of the month based on the previous month-end NAV of the Master Fund Shares.
Prior to the end of each month, the Master Fund receives Shareholder contributions with an effective subscription date of the first day of the following month. The Master Fund, in turn, makes contributions to certain Portfolio Funds, which have effective subscription dates of the first day of the following month. These amounts are reported as "Subscriptions received in advance" and "Investments made in advance", respectively.
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Notes to Financial Statements (continued)
March 31, 2014
The Master Fund reserves the right to reject in whole or in part, in its sole discretion, any request to purchase Shares at any time.
Repurchase of Shares
No Shareholder will have the right to require the Master Fund to redeem his, her or its Shares (or any portion thereof). The Master Fund from time to time may offer to repurchase Shares pursuant to written tenders by the Shareholders. These repurchases are made at such times and on such terms as may be determined by the Board from time to time in its sole discretion. With respect to any future repurchase offer, Shareholders tendering Shares for repurchase must do so by a date specified in the notice describing the terms of the repurchase offer, which will generally be approximately 75 days prior to the date that the Shares to be repurchased are valued by the Master Fund (the “Valuation Date”). The Master Fund may elect to repurchase less than the full amount that a Shareholder requests to be repurchased. If a repurchase offer is oversubscribed by Shareholders who tender Shares, the Master Fund may repurchase a pro rata portion of the Shares tendered by each Shareholder, extend the repurchase offer, or take any other action with respect to the repurchase offer permitted by applicable law. In addition, the Master Fund has the right to repurchase Shares of Shareholders if the Master Fund determines that the repurchase is in the best interest of the Master Fund or upon the occurrence of certain events specified in the Master Fund’s Declaration of Trust.
(k) | DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS |
Dividends will generally be paid at least annually on the Master Fund’s Shares in amounts representing substantially all of the net investment income, if any, earned each year. Payments will vary in amount, depending on investment income received and expenses of operation. It is likely that many of the Portfolio Funds in whose securities the Master Fund invests will not pay any dividends, and this, together with the Master Fund’s expenses, means that there can be no assurance the Master Fund will have substantial income or pay dividends.
It is anticipated that any gains or appreciation in the Master Fund’s investments will be treated as ordinary income or long term capital gains. Such amounts will generally be distributed at least annually and such distributions would be taxed as ordinary income dividends or long term capital gains to Shareholders that are subject to tax.
It is anticipated that substantially all of any taxable net capital gain realized on investments will be paid to Shareholders at least annually. The NAV per share (or portion thereof) that a Shareholder owns will be reduced by the amount of the distributions or dividends that the Shareholder actually or constructively receives from that share (or portion thereof).
Pursuant to a dividend reinvestment plan established by the Master Fund (the “Dividend Reinvestment Plan”), each Shareholder will automatically be a participant under the Dividend Reinvestment Plan and have all income distributions, whether dividend distributions and/or capital gains distributions, automatically reinvested in additional Shares. Election not to participate in the Dividend Reinvestment Plan and to receive all income distributions, whether dividend distributions or capital gain distributions, in cash may be made by notice to a Shareholder’s intermediary (who should be directed to inform the Master Fund). A Shareholder is free to change this election at any time. If, however, a Shareholder requests to change its election within 95 days prior to a distribution, the request will be effective only with respect to distributions after the 95-day period. A Shareholder whose Shares are registered in the name of a nominee (such as an Intermediary) must contact the nominee regarding its status under the Dividend Reinvestment Plan, including whether such nominee will participate on such Shareholder’s behalf as such nominee will be required to make any such election.
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Notes to Financial Statements (continued)
March 31, 2014
Generally, for U.S. federal income tax purposes, Shareholders receiving Shares under the Dividend Reinvestment Plan will be treated as having received a distribution equal to the amount payable to them in cash as a distribution had the Shareholder not participated in the Dividend Reinvestment Plan.
Shares will be issued pursuant to the dividend reinvestment plan at their NAV determined on the next valuation date following the record date (the last date of a dividend period on which an investor can purchase Shares and still be entitled to receive the dividend). There is no sales load or other charge for reinvestment. A request must be received by the Master Fund before the record date to be effective for that dividend or capital gain distribution. The Master Fund may terminate the Dividend Reinvestment Plan at any time upon written notice to the participants in the Dividend Reinvestment Plan. The Master Fund may amend the Dividend Reinvestment Plan at any time upon 30 day’s written notice to the participants. Any expenses of the Dividend Reinvestment Plan will be borne by the Master Fund.
The Master Fund follows fair valuation accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion in changes in valuation techniques and related inputs during the period. These standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is organized into three levels based upon the assumptions (referred to as “inputs”) used in pricing the asset or liability. These standards state that “observable inputs” reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources and “unobservable inputs” reflect an entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. These inputs are summarized in the three broad levels listed below:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Master Fund has the ability to access.
Level 2 - Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly or investments that can be fully redeemed at the NAV in the “near term”. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3 - Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Master Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available or investments that cannot be fully redeemed at the NAV in the “near term”; these are investments that generally have one or more of the following characteristics: gated redemptions, suspended redemptions, or have lock-up periods greater than quarterly.
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Notes to Financial Statements (continued)
March 31, 2014
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.
The Master Fund invests in Portfolio Funds, and classifies those investments as Level 2 or Level 3 depending on the Master Fund’s ability to redeem its interest in the near term. Portfolio Fund investments for which the Master Fund can liquidate its investment within 90 days are classified as Level 2.
The following are the classes of investments grouped by the fair value hierarchy for those investments measured at fair value on a recurring basis at March 31, 2014. The Portfolio Funds below were valued using the NAV as the practical expedient:
| Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
| | | | | | | | | | | | | |
| Investments in Portfolio Funds | | | | | | | | | | | | |
| Equity Long/Short Strategy | | $ | - | | | $ | 11,365,294 | | | $ | - | | | $ | 11,365,294 | |
| Equity Market-Neutral Strategy | | | - | | | | 5,806,947 | | | | - | | | | 5,806,947 | |
| Fixed-Income Relative Value Strategy | | | - | | | | 4,924,655 | | | | - | | | | 4,924,655 | |
| Global Macro Strategy | | | - | | | | 6,674,614 | | | | - | | | | 6,674,614 | |
| Multi-Strategy | | | - | | | | 3,267,490 | | | | - | | | | 3,267,490 | |
| Total Investments in Portfolio Funds | | | - | | | | 32,039,000 | | | | - | | | | 32,039,000 | |
| | | | | | | | | | | | | | | | | |
| Cash Equivalents | | | | | | | | | | | | | | | | |
| Money Market Fund | | | 158,542 | | | | - | | | | - | | | | 158,542 | |
| Total Investments in Portfolio Funds | | | | | | | | | | | | | | | | |
| and Cash Equivalents | | $ | 158,542 | | | $ | 32,039,000 | | | $ | - | | | $ | 32,197,542 | |
The Master Fund discloses transfers between levels based on valuations at the end of the reporting period. From August 1, 2013 (commencement of operations) to March 31, 2014, there were no transfers in or out of Level 1, Level 2 or Level 3 of the fair value hierarchy. Transfers between Levels 2 and 3 in the fair value hierarchy generally relate to changes in liquidity provisions of the Portfolio Funds.
In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11 “Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 requires disclosures to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards (“IFRS”). The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the Statement of Assets and Liabilities as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, ASU No. 2011-11 requires disclosure of collateral received and posted in connection with netting
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Notes to Financial Statements (continued)
March 31, 2014
agreements or similar arrangements. New disclosures are required for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods.
In January 2013, the FASB issued ASU No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU No. 2013-01 clarifies that ordinary trade receivables and payables are not included in the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending that are offset in accordance with specific criteria contained in the FASB Accounting Standards Codification.
The Master Fund is not required to disclose the applicable requirements of this accounting standard in its Notes to Financial Statements due to not directly investing in derivatives and other financial instruments. As such, no additional disclosures have been made on behalf of the Master Fund.
| (4) | INVESTMENT RISKS AND UNCERTAINTIES |
Portfolio Funds consist of non-traditional, not readily marketable investments, some of which may be structured as offshore limited partnerships, venture capital funds, hedge funds, private equity funds and common trust funds. The underlying investments of such funds, whether invested in stock or other securities, are generally not currently traded in a public market and typically are subject to restrictions on resale. Values determined by Portfolio Fund Managers and general partners of underlying securities that are thinly traded or not traded in an active market may be based on historical cost, appraisals, a review of the investees’ financial results, financial condition and prospects, together with comparisons to similar companies for which quoted market prices are available or other estimates that require varying degrees of judgment.
Investments are carried at fair value provided by the respective Portfolio Fund Managers. Because of the inherent uncertainty of valuations, the estimated fair values may differ from the values that would have been used had a ready market for such investments existed or had such investments been liquidated, and those differences could be material.
| (5) | CONCENTRATION, LIQUIDITY AND OFF-BALANCE SHEET RISK |
The Master Fund invests primarily in Portfolio Funds that are not registered under the 1940 Act and invest in actively traded securities, illiquid securities, derivatives and other financial instruments using different strategies and investment techniques, including leverage, which may involve significant risks. These Portfolio Funds may invest a high percentage of their assets in specific sectors of the market in order to achieve a potentially greater investment return. As a result, the Portfolio Funds may be more susceptible to economic, political, and regulatory developments in a particular sector of the market, positive or negative, and may experience increased volatility of the Portfolio Funds' net asset value.
Various risks are also associated with an investment in the Master Fund, including risks relating to the fund-of-funds structure of the Master Fund, risks relating to compensation arrangements and risks relating to limited liquidity, as described below.
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Notes to Financial Statements (continued)
March 31, 2014
Redemption restrictions exist for Portfolio Funds whereby the Portfolio Fund Managers may suspend redemption either in their sole discretion or other factors. Such factors include the magnitude of redemptions requested, portfolio valuation issues or market conditions.
In the normal course of business, the Portfolio Funds in which the Master Fund invests trade various financial instruments and enter into various investment activities with off-balance sheet risk. These include, but are not limited to, short selling activities, writing option contracts, contracts for differences, and interest rate, credit default and total return equity swap contracts. The Master Fund's risk of loss in these Portfolio Funds is limited to the value of its own investments reported in these financial statements by the Master Fund. The Master Fund itself does not invest directly in securities with off-balance sheet risk.
| (6) | RELATED PARTY TRANSACTIONS |
(a) | INVESTMENT MANAGEMENT FEE |
Under the terms of the Investment Management Agreement between the Investment Manager and the Master Fund, the Investment Manager is entitled to receive a management fee at an annualized rate, based on the month-end net assets of the Master Fund of 1.25%, accrued and payable monthly. Since the commencement of operations on August 1, 2013 through March 31, 2014, the Master Fund incurred $155,419 in management fees.
(b) | OPERATING SERVICES FEE |
The Master Fund pays to the Investment Manager, as compensation for the services provided by the Investment Manager and its agents under the Operating Services Agreement, an annualized fee of 0.15%, which is paid monthly, based on the month-end net assets of the Master Fund. Since the commencement of operations on August 1, 2013 through March 31, 2014, the Master Fund incurred $18,653 in operating services fees.
| (7) | COMPENSATION FOR TRUSTEES |
The independent Trustees are paid annual compensation for service on the Board and its Committees in an annual amount of $15,000 each. Such compensation encompasses attendance and participation at Board and Committee meetings, including telephonic meetings, if any. There are currently two independent Trustees. The Audit Committee Chairman and the Audit Committee Financial Expert also receives an annual amount of $15,000. In the interest of recruiting and retaining independent Trustees of high quality, the Board intends to periodically review such compensation and may modify it as the Board deems appropriate. In addition, through the Operating Services Agreement, the Investment Manager reimburses each independent Trustee for travel and other expenses incurred in connection with attendance at such meetings. Other Officers (apart from the CCO) and Trustees of the Master Fund who are “interested persons” by virtue of their affiliation with the Investment Manager receive no compensation in such role.
| (8) | INVESTMENT TRANSACTIONS |
Since the commencement of operations on August 1, 2013 through March 31, 2014 (excluding short-term securities), the aggregate purchases of investments were $30,100,000 and
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Notes to Financial Statements (continued)
March 31, 2014
sales of investments were $0. The Master Fund did not purchase long-term U.S. Government securities as a part of its investment strategy since the commencement of operations on August 1, 2013 through March 31, 2014.
The Master Fund offered to repurchase Shares in an amount up to 20% of the net assets of the Master Fund, calculated as of June 30, 2014 (the “Repurchase Valuation Date”), and each Share tendered for repurchase will be purchased at the net asset value per Share calculated on that date. Shareholders desiring to tender Shares for repurchase had to do so by 12:00 midnight, Eastern Time on April 28, 2014 (the “Notice Date”). Shareholders had the right to change their minds and withdraw any tenders of their Shares until 12:00 midnight, Eastern Time on April 28, 2014 (the “Expiration Date”). If the Master Fund accepts the tender of the Shareholder’s Shares, the Master Fund will make payment for the Shares it repurchases within 30 days of the Repurchase Valuation Date.
The Master Fund has adopted financial reporting rules regarding subsequent events, which requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. Management has evaluated the Master Fund’s related events and transactions that occurred subsequent to March 31, 2014 and determined that there were no significant subsequent events that would require adjustment to or additional disclosure in these financial statements.
Approval of Investment Management Agreement (Unaudited)
Overview | At an organizational meeting held on July 18, 2013, the Board of Trustees for the Steben Select Multi-Strategy Master Fund (“Master Fund”), including its independent Trustees, approved the investment management agreement (the “Agreement”) between the Master Fund and Steben & Company, Inc. (“Investment Manager” or “Steben”).
In preparation for review of the Agreement, the Board requested the Investment Manager provide substantial and detailed information which the Board determined to be reasonably necessary to evaluate the Agreement. The Investment Manager provided information relevant to the approval of the Agreement, including: (1) the nature and extent of the advisory and other services to be provided to the Master Fund by Steben; (2) Steben’s experience and personnel; (3) Steben’s financial condition; (4) information regarding the underlying Portfolio Funds, including their past performance; (5) the proposed advisory fee rates for the Master Fund; (6) benefits to be realized by Steben; and (7) the estimated profits and losses to Steben under the Agreement. The Board also received a presentation by the proposed portfolio management and research and due diligence teams addressing Steben’s investment philosophies, investment strategies, personnel and operations as they relate to the Master Fund.
The Trustees used this information, as well as other information that the Investment Manager and other service providers submitted to the Board, to help them decide whether to approve the Agreement. The Board posed questions to various management personnel of Steben regarding certain key aspects of the materials submitted in support of the approval of the Agreement. The Board also received a detailed memorandum from K&L Gates, counsel to the independent Trustees, regarding the responsibilities of the Board members in connection with their consideration of the Agreement.
With respect to the approval of the Agreement, the Board considered the overall fairness of the Agreement and factors it deemed relevant with respect to the Master Fund, including, but not limited to: (1) the nature, extent and quality of services to be provided to the Master Fund; (2) the investment performance of the underlying Portfolio Funds; (3) the costs of the services to be provided to the Master Fund and the expected profits and losses to be realized by Steben from its relationship with the Master Fund; (4) the extent to which economies of scale will be realized as the Master Fund grows; (5) whether the level of fee rates reflects those economies of scale for the benefit of Master Fund investors; (6) comparisons of services and fees with contracts entered into by Steben with other clients (such as pension funds and other institutional investors); and (7) any other benefits derived by Steben from its relationship with the Master Fund.
As discussed below, the Board considered many factors and a significant amount of information in evaluating whether the Agreement and the fees provided therein with respect to the Master Fund should be approved. The Board was advised by independent legal counsel with respect to its deliberations regarding the approval of the Agreement. The discussion below is not intended to be all-inclusive or intended to touch on every fact that the Board took into consideration regarding the approval of the Agreement. The determination to approve the Agreement was made on the basis of each Trustee’s business judgment after consideration of all the information presented. It is important to recognize that individual Trustees may have given different weight to certain factors and assigned various degrees of materiality to information received in connection with the approval process.
Nature, Extent and Quality of Advisory Services | The Board reviewed Steben’s investment strategies for the Master Fund. The Board considered that Steben will be responsible for making investment decisions on behalf of the Master Fund and noted Steben’s robust due diligence process and team to evaluate underlying Portfolio Funds. In this connection, the Board considered information regarding the background and experience of key investment personnel; Steben’s focus on complex asset categories; Steben’s experience as a sponsor of multi-manager alternative investment products; the depth and experience Steben personnel have in investment and operational due diligence; Steben’s investment process, analysis and monitoring of the underlying Portfolio Funds; the Investment Manager’s significant compliance and tax reporting effort; and Steben’s oversight of sales. The Board also considered financial information regarding Steben.
The Board considered that Steben will be responsible for oversight of compliance with the Master Fund’s policies and objectives, oversight of the Master Fund’s compliance with applicable law, and implementation of Board directives as they relate to the Master Fund. The Board noted that Steben would oversee and interact with the Master Fund’s service providers.
The Board concluded that the nature, extent and quality of the management and advisory service to be provided were appropriate and thus supported a decision to approve the Agreement.
Investment Performance | With respect to the Master Fund, the Board considered the performance of each of the intended initial underlying Portfolio Funds and various indices. On the basis of the Board’s assessment, the Board concluded that the Investment Manager was capable of generating a level of investment performance that is appropriate in light of the Master Fund’s investment objectives, policies and strategies.
Costs of Advisory Services and Level of Profitability | The Board considered the proposed advisory fee rate payable by the Master Fund to Steben under the Agreement, comparisons to the advisory fee rates of comparable funds, comparisons to the fee rate Steben receives on its pooled funds, the projected expense ratio of the Master Fund and the expense ratio of comparable funds. In addition, the Board noted the proposed operating agreement between the Master Fund and Steben would serve as a contractual expense limitation.
The Board evaluated the Investment Manager’s projected costs, profits and losses in providing services to the Master Fund. The Board noted that Steben projected losses relating to the services it will provide to the Master Fund. In analyzing the cost of services and profitability of the Investment Manager, the Board considered the potential revenues earned and expenses, noting that the analysis necessarily was based on estimates and projections of Master Fund asset accumulation, and that the Board would be able to make a much more complete assessment following the commencement of actual operations following the initial two-year period of the Agreement. The Board took into account the significant investment by and cost to the Investment Manager regarding service infrastructure to support the Master Fund and its investors.
On the basis of the Board’s review of the fees to be charged by the Investment Manager for investment advisory and related services, the relatively unique, and highly specialized nature of the Master Fund’s investment program, the Investment Manager’s financial information, and the estimated costs associated with managing the Master Fund, the Board concluded that the level of investment management fees is appropriate in light of the services to be provided, the management fees and estimated overall expense ratios of comparable investment companies, and the cap on expenses established by an operating services agreement.
Economies of Scale | While noting that the management fees will not decrease as the level of Master Fund assets increase, the Board concluded that the management fees are reasonable, reflect the Master Fund’s complex operations, and that the Master Fund is initially organized and starting up operations. The Board noted that it will have the opportunity to periodically re-examine whether the Master Fund have achieved economies of scale, as well as the appropriateness of management fees payable to the Investment Manager, in the future.
Benefits | In evaluating compensation, the Board considered other benefits that may be realized by the Investment Manager from its relationship with the Master Fund. In this connection, the Board noted, among other things, that Steben will receive compensation through an operating services agreement and pay all of the Master Fund’s operating expenses. The Board noted that the Investment manager would not realize “soft dollar” benefits from its relationship with the Master Fund. The Board concluded that other benefits derived by the Investment Manager from its relationship with the Master Fund, to the extent such benefits are identifiable or determinable, are reasonable and fair, result from the provision of appropriate services to the Master Fund and its investors, and are consistent with industry practice and the best interests of the Master Fund and its shareholders.
Other Considerations | The Board determined that the Investment Manager has made a substantial commitment both to the recruitment and retention of high quality personnel, monitoring and investment decision-making and provision of investor service, and as well as the financial, compliance and operational resources reasonably necessary to manage the Master Fund in a professional manner that is consistent with the best interests of the Master Fund and its shareholders.
Trustee and Officer Information (Unaudited)
The Master Fund’s operations are managed under the direction and oversight of the Master Fund’s Board. Each Trustee serves for an indefinite term or until he or she reaches mandatory retirement, if any, as established by the Board. The Board appoints officers of the Master Fund who are responsible for the Master Fund’s day-to-day business decisions based on policies set by the Board. Biographical information for the current Trustees and Officers, including age, principal occupations for the past five years, the length of time served as Trustee, the number of portfolios overseen in the complex of funds advised by the Investment Manager (“SCI Advised Funds”) and any public Director/ Trusteeships is set forth below. The Statement of Additional Information includes additional information about Trustees and Officers and is available, without charge by visiting www.steben.com.
Independent Trustees*
Name and Age | | Position(s) with Master Fund | | Principal Occupation(s) During the Past 5 Years | | Number of Portfolios in SCI Advised Fund Complex Overseen by Trustee | | Other Directorships During the Past 5 Years |
George W. Morriss# Age: 66 | | Trustee (Since 2013) | | Adjunct Professor, Columbia University School of International and Public Affairs, since October 2012; formerly, Executive Vice President and Chief Financial Officer, People’s Bank, Connecticut (a financial services company), from 1991 to 2001. | | 3 | | Trustee of Neuberger & Berman Funds complex (which consists of 55 funds), since 2007; formerly, Manager, Larch Lane Multi-Strategy Fund complex (which consisted of three funds), 2006 to 2011; formerly, Member, NASDAQ Issuers’ Affairs Committee, 1995 to 2003; Steben Alternative Investment Funds (Investment Company), (one fund). |
