Discounted closed-end funds occupy a fairly obscure corner of the finance world. Boaz Weinstein, a hedge fund manager who specializes in this niche type of mutual fund, has been raising their profile by linking them to the likes of Taylor Swift and Warren Buffett.
“Did you know that @taylorswift13 invests in discounted closed end funds?” the Saba Capital Management founder tweeted in mid-May. “You think I’m kidding, but her father Scott told me so!”
“For many reasons, it’s hard not to be a Swifty,” he added.
Weinstein name-dropped again in a Bloomberg interview this week. He disclosed that Warren Buffett, the famed investor and Berkshire Hathaway CEO, sent him in 2018 a list of his investments before he took Benjamin Graham’s class in 1950.
“The majority of Warren Buffett’s holdings when he was about to enter that class were discounted closed-end funds,” Weinstein said.
Saba’s chief investor also touched on Tesla and SpaceX CEO Elon Musk’s takeover of Twitter last year, while explaining his preference for closed end fund arbitrage.
“You don’t have to hope that Elon Musk buys Twitter,” he said about the key risk of merger arbitrage, which typically involves buying a stock in the hope it will jump in value once a proposed acquisition is completed. Similarly, successful capital-structure arbitrage relies on companies behaving a certain way or specific events taking place, he said.
“In closed-end fund arbitrage, you can actually control your destiny,” he said. The discount in a closed-end fund’s stock price can be eliminated through a board overhaul, a conversion into a different type of fund, a share tender, or even liquidation, he noted.
Weinstein’s firm takes activist positions in closed-end funds run by BlackRock and other big asset managers. These funds issue shares to raise money to invest, meaning their pool of investors is limited by the number of shares available. Closed-end funds are “discounted” if their shares are priced below the net value of their assets (NAV).
It’s easy to imagine Weinstein finds it hard to drum up interest in these esoteric funds. That may explains why he name-checked Buffett once again, as well as investing genius Ed Thorp, during his Bloomberg interview.
“You can hedge the closed-end with the underlying exposures like Ed Thorp used to do in the 1980s, or Warren Buffet thought it was cheap enough that you would hold it just outright,” he said.