Boaz Weinstein’s big bet on closed-end mutual funds paid off in a major way last year. And the credit specialist says there is still a lot more opportunity to make money in this investment play.
Weinstein is the founder of Saba Capital Management, which currently manages $1.7 billion. Last year his flagship hedge fund, Saba Capital Partners, surged 22.7 percent. It added another 1.6 percent in January this year.
Saba Capital CEF Opportunities 1 Onshore — a long-only fund launched in October 2015 — returned 25 percent last year and 5.6 percent in January.
One quarter of the flagship fund’s assets are invested in closed-end funds. Unlike traditional open-end funds, the closed-end funds have a fixed number of shares that trade on the stock exchanges. Investors cannot buy and sell their shares at net asset value. Instead, they buy them either at a discount or a premium to their net asset value.
Weinstein makes money two ways: from price appreciation as a fund narrows the NAV discount or moves to a premium, and from the interest payments of the underlying bonds or the dividends of the underlying stocks.
Weinstein prefers fixed-income CEFs because they offer attractive yields, especially thanks to their discounts.
The average discount of his closed-end portfolio is now an attractive 9 percent, down from about 10 percent or 11 percent nearly a year ago. Some funds are trading at discounts as wide as 13 percent to 15 percent.
This year alone Saba has filed a 13D with the Securities and Exchange Commission on at least four funds, indicating it holds potentially activist stakes of at least 5 percent in each of these funds. The most recent came last week, when it reported owning 11.37 percent of the Credit Suisse Asset Management Income Fund.
Saba has also filed a number of 13G documents, indicating passive holdings of at least 5 percent.
“We are growing our presence,” says Weinstein.
However, launching a proxy fight is not his strategy. He prefers working with fund management to pay a big dividend, buy back shares, or agree to liquidate the fund at NAV.
Recognizing that high-yield bonds have surged in price and narrowed their yield gap with comparable Treasury bills, Saba hedges the high-yield portfolio with iShares iBoxx $ High Yield Corporate Bond, an exchange-traded fund that invests in liquid high-yield bonds.
Closed-end funds, however, were not the only driver of performance last year. Saba also did very well in capital structure trades called credit against equity, especially in energy companies earlier in the year. Back in the first quarter of 2016, many energy bonds were reeling more than their stocks.
So, for example, Saba bought the distressed bonds of Chesapeake Energy Corp. at 10 cents to 15 cents on the dollar and hedged by shorting the equity, which Weinstein says was shockingly trading at a market capitalization exceeding $1 billion. This dichotomy is very rare. In effect, he bought the part of the company’s capital structure that was undervalued and shorted the overvalued part.
Many of these companies would issue stock to buy back debt, which would dilute the shares and boost the bonds.
More recently, Weinstein bought the bonds of Seadrill, a deepwater drilling contractor, for 40 cents or so on the dollar, yet its market cap is slightly above $1 billion.
Back in May, when Weinstein spoke about this investment opportunity at the SkyBridge Alternatives (SALT) Conference, he extolled how unusually attractive it was at the time.
These days, capital structure plays account for one quarter to one third of Saba’s portfolio. “It’s still interesting,” Weinstein adds. “But not as amazing as it was.”
