June 30, 2016 Steben Select Multi-Strategy Fund I Shares Dear Investor: Steben Select Multi-Strategy Fund I Shares (Steben Select) gained 1.10% in the second quarter of 2016, bringing year-to-date performance (net of all fees and expenses) to 1.58% with a trailing 12-month return of 5.25%. In comparison, the HFRI Fund of Funds Composite Index was up 0.61% for the quarter, but remains down -2.62% year-to-date (its worst first half start since 1994) and down -5.44% for the trailing 12-month period. The HFRI index is now 5.22% below its high water mark, which was reached in May 2015. In contrast, Steben Select reached a new high at the end of June. $130,000 Hypothetical Growth of $100,000 August 1, 2013 June 30, 2016 $125,000 $120,000 Steben Select Fund I Shares HFRI Fund of Funds Composite Index $124,797 $115,000 $110,000 $105,000 $100,000 $104,990 $95,000 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Market Review Second Quarter 2016 Fears over global economic growth that characterized the start of the year faded during most of the second quarter, as equities and other risk assets inched higher. This complacency came to a sudden end, however, when the British electorate shocked pollsters and investors by voting to leave the European Union in a referendum on June 24th. The British pound fell more than 8% in reaction, its largest one-day loss on record, sending it to levels not seen since the 1980s. The VIX volatility index spiked by 50%, and investors rotated from global equities into sovereign bonds, the Japanese yen and the US dollar. Amid the market turmoil at the end of June, the Fund enjoyed its best month of the year, exemplifying its non-correlated nature. The High Value of Low Correlation Steben Select s goal of achieving returns with a low correlation to traditional equity and bond investments is something that sets it apart from many funds of hedge funds. But why does low correlation matter? For many investors, the goal of adding alternative investments to a traditional portfolio is to improve its overall risk-adjusted return or Sharpe ratio. Remember, the Sharpe ratio is the average return earned in excess of the riskfree rate per unit of volatility or total risk. Generally, the greater the value of the Sharpe ratio, the more attractive is the risk-adjusted return. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AS WITH ANY INVESTMENT, THERE IS A POTENTIAL FOR GAIN AND A RISK OF LOSS.
Alternatives with a low correlation to traditional portfolios have two avenues of potentially improving overall portfolio risk-adjusted returns: by increasing the average rate of return and by reducing volatility through diversification. In contrast, alternatives that are highly correlated to traditional assets offer little diversification and cannot do much to reduce overall portfolio volatility. The only way for high correlation alternatives to improve the overall Sharpe ratio is by increasing the average rate of return. The result is that high correlation alternatives have a higher return threshold to reach before they improve investor portfolios. Low correlation alternatives can potentially improve portfolio Sharpe ratios more, even when they have lower rates of return, because they do much more to smooth overall volatility. An example might help solidify this concept. Over the period from January 1990 to June 2016, a 60/40 portfolio composed of the S&P 500 and the Barclays Aggregate Bond Index achieved an 8.4% rate of return with 9.0% volatility, giving a Sharpe ratio of 0.6 (assuming an average risk-free rate of 2.9%). Now let us consider adding a 20% allocation to either a high correlation or a low correlation alternative investment (with comparable volatility) to try to improve that Sharpe ratio. It turns out that a high correlation alternative (~ 0.8 correlation coefficient) would need a 7.5% rate of return to improve the portfolio s Sharpe ratio, while an uncorrelated alternative investment (zero correlation) would need a minimum rate of return of only 3.6% since it adds more value by lowering portfolio volatility. It is thus potentially easier for a low correlation alternative to improve a portfolio because its return bogey is lower. Steben Select seeks to maintain a low correlation to traditional asset classes and has a trailing 12-month correlation to a 60/40 portfolio equal to zero. This means Steben Select has a greater potential to improve overall portfolio Sharpe ratios than high correlation alternatives, given comparable rates of return. Fewer Low Correlation Hedge Funds Today Unfortunately for investors, hedge funds have on average become much more correlated to stocks over the past two decades. The correlation of the HFRI benchmark to the S&P 500 has risen from a low of 0.5 in the early 1990s to close to 0.9 today. This means that investors have to be very selective when choosing hedge fund investments, since the average manager often does not provide the expected benefits of diversification. 1.0 Rolling 3-Year Correlation Between HFRI Hedge Fund Index and S&P 500 TR Index January 1990 June 2016 The average hedge fund has become more correlated to stocks 0.9 Correlation Coefficient 0.8 0.7 0.6 0.5 0.4 Source: Bloomberg Dec 91 Feb 93 Apr 94 Jun 95 Aug 96 Oct 97 Dec 98 Feb 00 Apr 01 Jun 02 Aug 03 Oct 04 Dec 05 Feb 07 Apr 08 Jun 09 Aug 10 Oct 11 Dec 12 Feb 14 Apr 15 Jun 16 How does Steben Select maintain low correlation when average hedge fund correlations have risen so much? The answer is that we do not allocate to average hedge funds. We specifically seek out hedge fund managers with low correlations to traditional assets. Although broad hedge fund indices have become very correlated to stocks over time, there are still a variety of individual strategies and managers that have a less correlated return profile. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AS WITH ANY INVESTMENT, THERE IS A POTENTIAL FOR GAIN AND A RISK OF LOSS.
0.8 Hedge Fund Strategy Correlation to S&P 500 TR Index January 1990 June 2016 0.7 0.6 Correlation DCoefficient 0.5 0.4 0.3 0.2 Low Correlation Strategies 0.1 0.0 HFRI Equity Hedge HFRI Event-Driven HFRI Relative Value HFRI Macro HFRI Equity Mkt Neutral Source: HFRI, Pertrac For example, we can see that while there are some strategies like equity long/short and event driven that are highly correlated, others like equity market neutral and global macro have much lower correlations. Managers in those low correlation strategies would be candidates for inclusion in Steben Select. Correlation Distribution: % of Equity Long/Short Funds Distribution of Individual Equity Long/Short Hedge Funds' Correlations to S&P 500 TR Index June 2011 May 2016 15.00% 10.00% 5.00% 0.00% Low Correlations (0.30) (0.20) (0.10) (0.00) 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 Correlation to S&P 500 Total Return Source: Barclay Hedge, Pertrac Furthermore, even within high correlation strategies like equity long/short, there is a wide dispersion of individual manager correlations. Steben Select looks for candidates with lower correlation within the equity long/short universe. With careful selection, one can still build a portfolio of low correlation hedge funds, even though benchmark correlations have trended ever higher. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AS WITH ANY INVESTMENT, THERE IS A POTENTIAL FOR GAIN AND A RISK OF LOSS.
Steben Select Positioning and Outlook High equity valuations, shrinking corporate earnings and anemic global growth are all reasons why we continue to favor a low equity correlation target for Steben Select. Equity market neutral is currently the Fund s largest strategy allocation. As of May 31, 2016, the Fund s underlying positions had an aggregate beta to the S&P 500 of 0.07. This means that the Fund is largely insensitive to a rise or decline in the S&P 500. The Fund s sensitivities to other asset classes, such as bonds, commodities and real estate investment trusts have also been low. The Fund remains focused on hedge funds trading liquid underlying instruments, primarily stocks and futures, with limited exposure to less liquid instruments such as distressed debt and structured credit. Conversations with industry participants suggest that credit markets are more illiquid today than in the past because of regulations forcing banks to step back from their historical role as market makers. Our concern is that in the next market crisis, managers may either be unable to unwind illiquid credit positions, or have to take a large pricing haircut if they are forced to sell. At the end of the second quarter, Steben Select redeemed from one equity long/short manager. The Fund will add a new manager, Passport Capital, in the third quarter. Passport runs an equity long/short strategy based on topdown macroeconomic analysis. We believe this will complement the bottom-up style of the Fund s other equity long/short manager, Marshall Wace. Steben Select Performance Review for Q2 2016 Although both Steben Select and the HFRI Fund of Funds Index were profitable in the second quarter, these gains came from very different sources. The quarter saw a recovery in equity and credit indices after falling at the start of the year. While this rebound was the primary tailwind for the performance of other long-biased funds, it was not the source of Steben Select s profit. Instead, our gains came mainly from equity market neutral strategies, which benefited from high levels of stock dispersion. Equity long/short and fixed income relative value managers were also positive, while global macro and multi-strategy managers were detractors. Steben Select Strategy Allocations as of June 30, 2016 and Second Quarter 2016 Gross Performance Contribution by Strategy -1.17% 35% 18% 19% Multi-Strategy Global Macro Fixed Income Relative Value Low Beta Equity Long/Short Equity Market Neutral 0.25% 0.55% -0.18% 16% 12% 2.45% The Fund may change its allocation to the portfolio managers and to the various strategies at any given time. Performance by Strategy presents the weighted contribution for each strategy traded in the Fund, over the period shown. Performance attribution is net of managers management and incentive fees and is gross of Fund fees.
Gross Performance Contribution by Strategy as of June 30, 2016 Weighted Contribution to the Fund Performance Low Beta Equity Long/ Short Equity Market Neutral Fixed Income Relative Value Global Macro Multi- Strategy Return Contribution 2Q16 0.55% 2.45% 0.25% -0.18% -1.17% Return Contribution YTD -0.90% 3.52% -0.30% 0.56% 0.05% Return Contribution Since Inception Annualized 1.47% 4.29% 0.55% 1.81% 2.36% Allocation End of June 2016 16.1% 34.1% 12.3% 19.8% 17.8% NOTE: Gross Returns are net of underlying Portfolio Fund fees, but exclude Steben Select and Select Master Fund fees. Closing Thoughts As Steben Select approaches its 3rd anniversary at the end of July 2016, we are pleased that the Fund has differentiated itself from its peers by delivering on its low correlation goals, while outperforming fund of funds benchmarks. We are always working hard to identify additional managers and strategies to help continue the Fund s unique risk and return profile over the coming years. Thank you for your investment and continued confidence in Steben & Company. If you have any questions, please contact your financial advisor or speak with us directly at 240.631.7600. Sincerely, John Dolfin Chief Investment Officer Steben & Company, Inc. Fund returns are estimated and are subject to change, pending final monthly accounting review. 1. Performance data quoted represents past performance and is no guarantee of future results. Returns are estimated and are subject to change, pending final monthly accounting review. Fund performance is shown net of all fees and expenses, including Management and Distribution/Service Fees, Acquired Fund Fees and Other Expenses. Performance results prior to August 1, 2014 are those of the Steben Select Multi-Strategy Master Fund adjusted for fees and expenses of Select Fund I Shares. More detailed information regarding fees, expenses and performance calculations may be found in the Performance Disclosures section of this Letter and within the Fund s prospectus. 2. Portfolio Funds and allocations to trading strategies can change at any time, affecting the Fund s expected risk exposure. The views in this material are intended to assist readers in understanding certain investment methodology and do not constitute investment or tax advice. The views in this material were those of the author as of the date of publication and may not reflect his view on the date this material is first published or any time thereafter. This material is not an offer or a solicitation of an offer to buy shares in any fund or security to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
RISK CONSIDERATIONS Steben Select Multi-Strategy Fund (the Fund) is part of a master-feeder structure and invests in a closed-end, non-diversified investment company with the same objectives and strategies (Master Fund), which in turn invests in hedge funds (Portfolio Funds). Fund investors will bear asset-based fees and expenses of the Fund, which includes the Fund s pro rata portion of the fees and expenses of the Master Fund and, indirectly, of the Portfolio Funds. Those fees may include performance-based compensation of the underlying managers. An investment in the Fund is speculative and there is no guarantee that the Fund will achieve its investment objectives. An investment in the Fund should be viewed as part of an overall investment program and should only be made by investors willing to undertake the risks involved. Investments in securities involve risk of the loss of capital. An investment in the Fund includes the risks inherent in an investment in securities, as well as specific risks associated with limited liquidity, restricted liquidity of certain investments, distressed securities and other high risk investments, foreign currency translation, longbiased strategies, sector specific risks, counterparty risk, convertibles, use of derivatives for hedging and nonhedging purposes, leverage/borrowing, purchases of initial public offerings, valuation, master-feeder structure, use of short selling, investment in junk bonds, high portfolio turnover rate, conflicts of interest, options, futures, commodities, real assets and investment in non-us securities. Both the Fund and the Master Fund are registered as investment companies with the Securities and Exchange Commission (SEC). However, the Portfolio Funds are not registered with the SEC. Although registered as investment companies, both the Fund and Master Fund have limited liquidity and do not provide daily net asset values. The Portfolio Funds may be highly leveraged. A portfolio of hedge funds may increase the potential for losses and gains. One or more underlying managers may, from time to time, invest a substantial portion of the assets managed in a particular market or sector. As a result, the Portfolio Funds (as well as the Fund) may be subject to greater risk and volatility than if investments had been made in the securities or derivatives of a broader range of issuers. There can be no assurance that an underlying manager s strategy will be successful or that it will employ such strategies with respect to its entire portfolio. The Portfolio Funds in which the Fund invests can be highly illiquid and may not be required to provide periodic pricing or valuation to investors. The overall performance of the Fund is dependent not only on the investment performance of individual managers, but also on the ability of the Fund s Investment Manager to effectively select and allocate the Fund s assets among such managers on an ongoing basis. The Fund may be less diversified and more subject to concentration risk than other funds of hedge funds. The value of the Fund s portfolio investments should be expected to fluctuate. The Fund s shares are not listed on any securities exchange, and it is not anticipated that a secondary market for shares will develop. The Fund cannot guarantee that investors will be able to effect repurchases of as many shares as they request. Steben & Company and the underlying portfolio fund managers may face conflicts of interest. Shares are offered pursuant to the terms of the prospectus and (i) are not FDIC-insured, (ii) are not deposits or other obligations of, or guaranteed by, any bank and (iii) involve investment risks, including possible loss of principal. Diversification among multiple hedge funds does not assure profit or guarantee against losses. Select Fund is part of a master-feeder structure and invests all of its investable assets in the Master Fund. By investing all of its investable assets in the Master Fund, Select Fund participates in the substantially similar in vestment management that Steben & Company, Inc., the Adviser, renders to the Master Fund. PERFORMANCE DISCLOSURES Performance data presented herein is the historical performance data of Select Fund and the Master Fund. There can be no assurance that Select Fund and the Master Fund will achieve their objectives or avoid significant losses. Investment results will fluctuate so that an investor s shares, if repurchased in a tender offer, may be worth more or less than the original cost. Select Fund s shares are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their shares. The Fund however, intends to con duct quarterly share repurchases, subject to an early withdrawal fee of 2% within the first 9 months of an investor s subscription. Final and current performance may be higher or lower than the performance data quoted. Diversification does not assure a profit or protection against losses. The Fund invests
all of its investable assets in the Master Fund, except those restricted for regulatory reasons, liquidation purposes or forced redemptions. Investment Management Fee. The Master Fund pays the Investment Manager a monthly fee equal to 1.25% (on an annualized basis) of its month-end net asset value of outstanding Shares of the Master Fund determined as of the last calendar day of that month before giving effect to any purchases or repurchases of Shares or any distributions by the Fund. Operating and Distribution Costs. Operating and Distribution costs total 0.70% annually. Acquired Fund Fees. As of the period ended March 31, 2016, Acquired Fund Fees totaled 8.05%, which included all incentive fees paid to the Portfolio Funds based upon the profit of those Funds for the period. INVESTOR CONCERNS AND SUITABILITY The Fund is available for investment only by accredited investors and is appropriate only for investors who can bear risks associated with limited liquidity and should be considered a long-term investment. Investors may lose some or all of their investment and should carefully consider their investment objectives, personal situation, and other factors such as net worth, income, age, risk tolerance and liquidity needs before investing in the Fund. Investors should carefully consider the Fund s investment objectives, risks, conflicts, tax considerations, charges, and expenses before investing. Before investing, you should carefully consider the Fund s investment objectives, risks, charges and expenses. For a prospectus that contains this and other information about the Fund, please contact Steben & Company at 800.726.3400 or info@steben.com. Please read the prospectus carefully before you invest. Barclays Aggregate Bond Index*: A market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. HFRI Fund of Funds Composite Index*: Comprised of over 500 domestic and offshore funds of hedge funds that have a minimum of $50 million under management or a 12-month track record of active performance. All index fund performance is equally weighted and is net of all fund fees. HFRI Equity Hedge (Total) Index*: Equity Hedge: Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities, both long and short. HFRI Event-Driven Index*: Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure. HFRI Relative Value (Total) Index*: Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive
positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. RV position may be involved in corporate transactions also, but as opposed to ED exposures, the investment thesis is predicated on realization of a pricing discrepancy between related securities, as opposed to the outcome of the corporate transaction. HFRI Macro (Total) Index*: Macro: Investment Managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short term holding periods. Although some strategies employ RV techniques, Macro strategies are distinct from RV strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments, rather than realization of a valuation discrepancy between securities. In a similar way, while both Macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying macroeconomic variables may have on security prices, as opposes to EH, in which the fundamental characteristics on the company are the most significant are integral to investment thesis. HFRI EH-Equity Market Neutral Index*: Equity Market Neutral strategies employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale. These can include both Factor-based and Statistical Arbitrage/Trading strategies. Factor-based investment strategies include strategies in which the investment thesis is predicated on the systematic analysis of common relationships between securities. In many but not all cases, portfolios are constructed to be neutral to one or multiple variables, such as broader equity markets in dollar or beta terms, and leverage is frequently employed to enhance the return profile of the positions identified. Statistical Arbitrage/Trading strategies consist of strategies in which the investment thesis is predicated on exploiting pricing anomalies which may occur as a function of expected mean reversion inherent in security prices; high frequency techniques may be employed and trading strategies may also be employed on the basis on technical analysis or opportunistically to exploit new information the investment manager believes has not been fully, completely or accurately discounted into current security prices. Equity Market Neutral Strategies typically maintain characteristic net equity market exposure no greater than 10% long or short. S&P 500 Index*: A broad-based, unmanaged measurement of changes in stock market conditions based on the average of 500 widely held common stocks. *It is not possible to invest directly in an index. Beta is a measure of a fund s sensitivity to market movements. A portfolio with a beta greater than 1 is more volatile than the market, and a portfolio with a beta less than 1 is less volatile than the market. Standard Deviation measures the dispersal or uncertainty in a random variable (in this case, investment returns). It measures the degree of variation of returns around the mean (average) return. The higher the volatility of the investment returns, the higher the standard deviation Foreside Fund Services, LLC, Distributor