Shaker Financial Services (SFS) is an investment advisory firm that, like hedge fund managers, employs sophisticated quantitative strategies with the goal of maximizing the return and minimizing the risk of your investments. But unlike hedge funds, there is no lock-in period; you can, in fact, withdraw any portion of your equity at any time. You can view your account holdings and balances on the internet. Further, we consider your risk profile, preferences and tax situation in constructing your portfolios.
SFS Composite S&P 500* year to date -3.32 -11.01 1 year -35.40 -38.08 3 years -6.84 -13.06 5 years 1.26 -4.76 10 years 10.13 -3.00
SFS first began to accept funds for investment in individual accounts in 1995, following the retirement of its founder, Dr. Richard J. Shaker, from the National Security Agency. From humble beginnings (assets under management in December, 1995 were less than $1 million), SFS has grown. Despite limited marketing, investment inflows have been consistent and significant, thanks primarily to referrals from clients. Current assets under management are in excess of $40 million.
COMPOSITE PERFORMANCE
Annualized Performance Returns[1] as of 03/31/09
* with dividends reinvested.
Currently, in some of our literature, we reference the performance of our composite of individually managed accounts. Our composite includes all fee-paying accounts that we manage. However, we work with clients individually to establish the general risk parameters and account preferences which best suit their investment objectives. Our composite contains all accounts which participate in all of SFS’s investment strategies and have varying risk levels assigned to each. This is one factor which will cause an individual client’s performance to differ from the composite performance.
CLOSED END FUNDS AND THE SFS DIFFERENCE SFS does not simply buy and hold CEFs but instead takes advantage of their inefficiencies. Because of this, our investment strategy results in high portfolio turnover. In our twelve years of experience with CEFs, we have formulated a number of strategies to identify and capitalize on these inefficiencies and convert them into profitable trades. In one of our core strategies, “discount trading,” we buy CEFs when their discounts are wider than their historic averages and sell them when the discounts narrow. Other SFS strategies take advantage of tenders and rights offerings; anticipate open-endings and liquidations, in which discounts are captured as profit; and arbitrage CEFs which have scheduled liquidations.
We believe effective CEF-trading requires persistence and careful attention to detail. SFS actively follows over 300 CEFs daily. Our software tools and minute-by-minute monitoring of the markets help us recognize anomalies and convert them into opportunities for profit. We believe that our strategies and our work ethic are vital to the performance record we have achieved and to our future performance.
INDIVIDUALIZED ACCOUNTS
In tailoring client accounts, we primarily utilize three individually assigned factors: target beta, target margin exposure and risk level. Target Margin: We encourage eligible accounts to employ margin, as we believe the use of margin allows us to enhance an individual’s return. Through discussions with each client, we assign to each a target margin level. It is important to note that in using margin, we do not inflate the beta risk described above, as this calculation is conducted on the actual equity level of the account (as opposed to the total asset level including margin). Clients receive priorities on purchases and sales of securities with low market correlation to the extent that they are under or over their target margin level.
Risk Level: Through discussion with our clients, we assign each client a risk level. For the vast majority of clients, this risk level will be the default determiner of the target beta and target margin level for the client. Additionally, risk level is used to determine whether a specific client will or will not be allocated a trade based upon the fundamental nature of the fund and/or the nature of the strategy being employed.
Based upon observations of certain market and/or closed end fund circumstances, SFS periodically modifies the default levels discussed above, for those clients who have given us the authority to do so.
NOT TOO BIG, NOT TOO SMALL
We currently use TD Ameritrade as our broker and custodian. We are large enough to negotiate favorable commission and margin interest rates. At the same time, we are small enough that we can find opportunities that benefit all our clients. And we are small enough to know all of our clients well.
Although some SFS strategies employ other investment vehicles, the majority of our client holdings are closed end funds (CEFs). CEFs are companies that do nothing other than invest in a portfolio of securities. Unlike exchange-traded-funds or mutual funds, CEFs trade at varying discounts or premiums to the value of the securities they hold. Because CEFs specialize in equities, bonds, sectors, foreign markets or investment strategies, they are excellent vehicles for crafting portfolios that are balanced, diversified and have the particular risk level and market exposure that an individual client desires.
Target Beta: Beta is a measure of the tendency of a portfolio to respond to a market change of a fixed index. For our purposes, we use the SP500 as the beta target. In discussions with each client, we assign a target beta level. We monitor daily our estimate of the client’s portfolio’s beta and use this information to determine priorities for assignments of buys and sells of equity funds to individual client accounts.
As described more thoroughly in our disclosure forms, accounts opened now must total at least $200,000. Our standard annual fee, 2% of net asset value, charged in four quarterly installments, is discounted for larger accounts. Although minimum account value and fee structure are subject to change at any time, clients are guaranteed a fee structure no greater than when they open their accounts.
[1] Performance data for the S&P 500 TR Index was taken from Standard & Poor’s April 1, 2009 press release. Although this index is thought to be representative of the stock market as a whole, SFS invests in sectors not contained in the S&P 500, including midcap, smallcap and international equities and fixed income issues. We construct portfolios for clients that we believe have systemic risk less than that of the S&P 500 TR Index, but there can be no guarantee that this is the case. The S&P 500 TR Index has not been selected to represent an appropriate benchmark to compare to SFS’s performance but rather is disclosed to allow for comparison of SFS’s performance to that of a well-known and widely recognized index.
