Boaz Weinstein’s New York–based Saba Capital Management continues to exploit specialized niche investment opportunities, launching its second new investment strategy in less than a year, following the launch of two highly successful funds last year.
The firm’s newest hedge fund, Saba Capital Index Trading, is an index strategy focused on trading relative value in credit derivative indexes. It is designed to be a small niche fund; it has raised about $13.5 million and is not expected to grow much. It follows the launch of two funds in 2015 that specialize in investing in closed-end mutual funds. So far they have worked out very well — a welcome change for a once high-flying firm that managed $5 billion before a multiyear losing streak depleted its assets.
Through August the firm’s Saba Capital CEF Opportunities 1 Onshore — a long-only fund launched in October — had gained 21.5 percent, while its CEF Opportunities 2 Onshore, the hedged class of the strategy, launched in February 2016, returned 11.5 percent. The two funds combined have about $100 million, and the firm thinks they will perform best with $500 million or less in assets. Meanwhile, the firm’s flagship fund, Saba Capital Offshore Fund, gained 10 percent in the first eight months of the year. Last year the flagship fund returned about 3.4 percent, and its double-digit gain this year far exceeds the average hedge fund return as well as popular benchmarks like the S&P 500 stock index.
This marks something of a comeback for Weinstein, who made his only appearance on Alpha’s annual Rich List ranking of the world’s top-earning hedge fund managers in 2012 after posting a 9.3 percent gain in his flagship fund in 2011, earning $100 million. However, Weinstein lost money the next three years, with the fund dropping between roughly 4 percent and 11 percent over that period. Not surprisingly, unhappy investors bailed out of his fund, and assets plummeted. Today the firm manages a total of $1.6 billion.
A big reason for this year’s success is Weinstein’s closed-end strategy, a simple but clever trade that has been deployed by investors for several decades. Basically, closed-end mutual funds invest their assets in the same way as their more popular open-end mutual fund counterparts, but unlike with the open-end funds, investors cannot buy and sell their shares at net asset value. Rather, closed-end funds trade on a stock exchange, at either a discount or a premium to their net asset value.
Weinstein makes money from price appreciation when a given closed-end fund’s discount to NAV narrows or turns to a premium, but he also makes money on the interest payments of the underlying bonds or the dividends of the underlying stocks.
“Fixed-income CEFs offer a nice yield pickup to high yield bonds or CLOs [collateralized loan obligations] because of the discount, which also provides investors an extra margin of safety,” Weinstein tells Alpha.
Weinstein says he became interested in closed-end funds as an investment opportunity in 2013 and began investing more aggressively in 2015. Today there are 561 closed-end funds — about 222 are equity funds, 152 are taxable fixed-income funds, and 187 are tax-exempt fixed-income funds — with a combined $246 billion in NAV. All are listed on the New York Stock Exchange.
Investors’ search for yield wherever they can get it has increased the appeal of high-yield closed-end funds, even though their underlying high-yield bonds have increased in price in recent months, which has knocked down the average yield. The current discount across all taxable fixed-income closed-end funds is just 3.5 percent. But keep in mind that closed-end funds have often traded at premiums as well, such as from 2012 to 2013. Weinstein thinks this could happen again.
“With so little yield in the fixed-income markets, I think the whole space will return to the premiums we saw in 2013,” Weinstein tells Alpha.
Saba has invested about $750 million of its total $1.6 billion in assets in closed-end funds, including about 15 percent of its flagship fund’s assets. Weinstein says the biggest discounts and opportunities are in fixed-income funds, since they offer much higher yields than the equity funds, even though equity funds pay dividends. He also does not like that some equity funds have holdings in private companies, which are hard to value on a regular basis.
Weinstein’s favorite fund is BlackRock Debt Strategies Fund, a high-yield fund that is now yielding 6.5 percent. It is also trading at a roughly 9.5 percent discount to NAV. The stock accounts for roughly 11 percent of Saba’s CEF portfolio.
He also has a big position in Blackstone/GSO Strategic Credit Fund, which mostly invests in secured debt. It has a yield of about 8.5 percent and is trading at a 9.9 percent discount to NAV. Saba also has several funds invested in convertible bonds.
Weinstein says the big money management firms like Blackstone Group and AllianceBernstein are more likely to agree to some sort of measure that would narrow or close the discount rather than the funds managed by small shops whose livelihoods depend on retaining control of the funds under the current structure.
Says Weinstein, “With so many CEF managers doing the right thing for shareholders by collapsing the discounts, it will be hard for others not to feel compelled to do the same.”
