How is SelectAlts different?

To our knowledge, SelectAlts is the only firm in existence that focuses exclusively on managing absolute return ETF portfolios.

  • We are different than most traditional investment firms that focus on long-only stock and bond investments. We avoid generic stock and bond investments and focus on ETFs that have strategies that are quite different than most stock and bond portfolios.  Our goals are to 1) provide an attractive absolute return and 2) diversify stock and bond investments.
  • We are different than most alternative investment firms (hedge funds and funds-of-funds) that charge high fees, have lock-up provisions and limited liquidity, are only open to qualified investors, and give out very little information about their investment positions.  We have comparatively low fees, welcome all investors, and manage separate accounts giving clients complete liquidity, transparency, and control.
  • We are different than most investment firms that manage ETF portfolios in that we focus exclusively on absolute return portfolios and hedge much of the inherent systematic risk in our portfolios, particularly stock market risk.
What are ETFs?

Like mutual funds, exchange-traded funds (ETFs) offer investors a convenient way of owning a portfolio of securities, except that ETF shares are traded on stock exchanges. An exchange-traded fund (“ETF”) combines the valuation feature of a mutual fund, which can be bought or sold at the end of each trading day for its net asset value (the market value of the securities portfolio), with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. (Closed-end funds are not considered to be “ETFs”, even though they are funds and are traded on an exchange.) Nearly all ETFs are index funds (only a few are actively managed), and their fees are typically quite low.

What are ETNs?

ETNs are like ETFs in many respects. Both typically provide returns based upon an index. Both trade on stock exchanges. Both tend to have low fees. However, unlike ETFs, exchange-traded notes (ETNs) are debt securities issued by an underwriting bank, and are backed by the credit of the issuing bank. And unlike ETFs, ETNs do not own the actual portfolio of securities in the index. Typically, ETNs are based upon indexes of securities that are illiquid and expensive to trade, are based upon strategies that have high turnover and/or high taxes (e.g., futures), or are tied to indexes in countries that restrict foreign ownership. If held longer than one year, any gains on sale may be considered long-term gains for tax purposes, giving ETNs an important potential tax advantage over ETFs.

What are ETPs?

Although in common parlance the term ETF is used to connote all exchange-traded products (ETPs), technically ETPs include four different legal structures:

  • Exchange Traded Fund (ETF): Open-ended Registered Investment Company (RIC) or Unit Investment trust (UIT) that is registered under the Investment Company Act of 1940, and traded by investors on national securities exchanges.
  • Exchange Traded Vehicle (ETV): Open-ended trust or partnership unit that is registered under the Securities Act of 1933 and traded by investors on a national securities exchange. Commodity and currency trusts are common.
  • Exchange Traded Note (ETN): A senior unsecured debt obligation, of a public company issuer, designed to track the total return of an underlying index or other benchmark, minus investor fees. They are redeemable to the issuer.
  • Certificate: A security with the characteristics of a complex debt instrument. They are issued by a public company issuer (usually banks) and have settlement terms on a given date that are known at the time of issue. They cannot be redeemed to the issuer.

(Source: NYSE Euronext website: https://exchanges.nyx.com/charles-baker/welcome-etp-landscape)

What securities do you invest in?

Although we invest mostly in ETFs, we also use the other types of ETPs. We do not invest directly in stocks. In our Multi-Strategy Portfolio, we only invest in long positions, but in our Global Macro Portfolio we invest in both long and short positions. Similarly, in our Multi-Strategy Portfolio we do not use any leverage, but in our Global Macro Portfolio we use leverage of up to 2.5 to 1.

What custodian do you use and why?

After an extensive search, we chose to use Interactive Brokers* as the preferred custodian for our client accounts. Not only are they arguably the lowest cost custodian (they charge only $.005 per share for trades with no ticket charge, $7.50 per quarter for IRA accounts, and nothing at all for non-IRA accounts), they also offer excellent trading technology. They are extremely automated and this no doubt helps them to keep costs down. They have many sophisticated trading algorithms that help to ensure the best execution possible. We are willing and able to work with other custodians for larger institutional accounts. Over time we expect to establish accounts at many different custodians but at present we are focusing on Interactive Brokers.

[*Interactive Brokers LLC is not affiliated with and does not endorse or recommend Select Alternative Investments. Interactive Brokers provides execution and clearing services to customers of Select Alternative Investments. For more information regarding Interactive Brokers LLC and current fee schedules, please visit www.interactivebrokers.com.]

How do I know my money will be safe with Interactive Brokers?

Interactive Brokers* (IB) may be the largest broker you’ve never heard of. They are publicly traded firm (ticker: IBKR) with substantial consolidated equity capital. The public owns only 11.5% of the brokerage firm and the employees own the remaining 88.5%, which means that they participate in the downside as well as the upside. Consequently, they run the business very conservatively. Unlike most investment banks, they own no material positions in derivatives, CDOs, MBS, or CDS. They have reported solidly positive earnings for the past 20 years, including 2008.

Customer money is segregated in special bank or custody accounts. Their real-time (that’s right, not overnight—real time) margining system marks all positions to market continuously, and all customer orders are credit vetted before being executed to ensure adequate margin. Currently, customer securities accounts at Interactive Brokers are protected by the Securities Investor Protection Corporation (“SIPC”) for a maximum coverage of $500,000 (with a cash sublimit of $250,000) and under Interactive Brokers’ excess SIPC policy with certain underwriters at Lloyd’s of London for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million. Futures, and options on futures are not covered. As with all securities firms, this coverage provides protection against failure of a broker-dealer, not against loss of market value of securities.

[*Interactive Brokers LLC is not affiliated with and does not endorse or recommend Select Alternative Investments. Interactive Brokers provides execution and clearing services to customers of Select Alternative Investments. For more information regarding Interactive Brokers LLC and current fee schedules, please visit www.interactivebrokers.com.]

How do I open an account?

Our investors own and have complete control over their accounts. SelectAlts is merely given trading authority, which can be revoked by the client at any time. To get started, we e-mail our clients a link to Interactive Brokers’ website which will guide them through the process of opening an account. The application process is entirely automated and takes about 30 minutes to complete. We encourage clients to fund their accounts by wire transfer if possible since mailing a check may involve a substantial delay before IB receives the collected funds.

What fees will I be charged?

As is the case for most fund of funds-type structures, our clients pay two layers of fees—one for the underlying funds and another to us for our active management of the portfolio of funds. We recognize that costs matter and we seek to provide a high degree of performance value-added at a reasonable cost compared to the usual methods of investing in alternatives. ETFs are a low-cost means of obtaining exposure to a wide variety of investment strategies. The average expense ratio of funds in our universe is about 0.60%, with most funds falling in the range of 0.40% to 0.90%.

In our Global Macro Portfolio, short positions roughly equal long positions, so the expenses paid out on long positions are roughly offset by the depreciation in value on short positions due to expenses.  On the other hand, borrowing a stock to sell it short incurs a stock loan fee.  Also, to the extent that margin is used, margin balances are subject to an interest charge.  Our research indicates that Interactive Brokers’ margin rates and borrow costs are very competitive.

Trading and custody expenses at Interactive Brokers* are extremely low. Commissions on trades are only $.005 per share. (That’s right—half a penny.) They charge only $7.50 per quarter for IRA accounts and no fee at all for non-IRA accounts.

SelectAlts’ absolute return strategies are designed to compete with absolute return-style hedge funds, which typically charge an asset-based fee of 2% and a performance-based fee of 20% of profits. Our intention in fixing our fees is to be less expensive than the typical hedge fund or fund-of-funds. Please see our Fee Schedule for complete details.

[*For more information regarding Interactive Brokers LLC and current fee schedules, please visit www.interactivebrokers.com.]