In the world of Wall Street, people make mistakes all the time.
The financial analyst who whiffed on a stock and lost a client…
The quant who failed to recognize the small formula error in their spreadsheet…
The OTC broker who fat-fingered a transaction…
These are all common, slap on the wrist, types of mistakes that are fairly easy to overcome.
But losing a series of trades that costs your firm $6.2 billion… triggers a criminal investigation involving 1,000-plus coworkers… and forces the CEO of your company to take a pay cut…?
Now that’s the kind of stuff that makes you Public Enemy No. 1.
Bruno Iksil, now notoriously known as the London Whale, was the man initially held responsible for this multibillion-dollar mistake.
“Every single authority, everyone, I think, reading the press articles, wanted to behead me or destroy me or smash me,” Iksil said.
In a sense, what Iksil and his colleagues did was the same old story — doubling down after a loss with bigger and bigger bets.
But plenty more was wrong.
Iksil worked at the Chief Investment Office (CIO) of megabank, JPMorgan Chase & Co in London. His job was to implement hedging strategies and limit the bank’s risk level. But as the story unfolded, what he did was actually quite the opposite.
Instead, the CIO became a moneymaker of sorts that started dabbling in complex derivative trades. In 2011, for example, one trade by Iksil brought in $400 million.
Initially, it was a successful stint… but not one that lasted.
You see, although a $400 million gain sounds impressive (and it is!), let’s not forget that Iksil’s job was to “implement hedging strategies.” Making money like that is not a hedge… it’s a bet.
And as expected, things turned south when the CIO got heavily involved in a series of derivative transitions surrounding credit default swaps (CDS). Iksil’s team accumulated CDS positions so large that they started to disrupt the thinly traded markets they worked in.
Prices started to get out of whack. The volume was off the charts. Nothing made sense.
Unfortunately for Iksil, just when the CIO realized how deep in the hole they were, something to the likes of a child prodigy from across the Atlantic took notice.
He, along with a few like-minded fund managers, began taking bets against what would come to be known as the “London Whale”, forcing it to take big losses.
The end result? One of the biggest trading flubs since the Great Financial Crisis.
Now, the loser of this trading battle was quite obvious. The London Whale himself was fired pretty much on the spot. Additionally, Jamie Dimon and company had to deal with a massive quarterly loss, penalties, and a fresh regulatory hurdle.
The winner, on the other hand, was not so obvious.
It wasn’t until months later when the New York Post dug into who took the other side of that trade and eventually reported that a virtually unknown “38-year-old hotshot trader and chess master was the driving force behind the harpooning of the London Whale.”
Enter Boaz Weinstein.
The harpooning of the London Whale is what made him famous. His most recent feat, however, just made him a living legend.
And gives investors another reason to invest alongside Boaz Weinstein’s newest project – a tiny under-the-radar public fund that encompasses all the things we love about investing.
Saba Capital Income and Opportunities Fund (BRW)
Today we are going to discuss a compendium of our favorite investment strategies, including:
- Closed-end fund arbitrage
- Activism
- Tail Hedging
- SPAC arbitrage
We could teach you how to execute each of these strategies independently, but generally speaking, you need tens, if not hundreds, of thousands of dollars to make them work for you.
Today though, with the help of Boaz Weinstein, we’re going to show you a single investment that you can use to implement these wildly successful investment strategies with as little as a few hundred dollars.
We’ve already discussed Boaz’s legendary London Whale bet, but now let’s dig into our protagonist a little further.
Who is Boaz Weinstein?
Most of you have never heard of Boaz Weinstein before. In fact, Mr. Weinstein goes to great lengths to keep a relatively low profile…
But that’s hard to do when you are probably the best fixed-income investor of our time.
You see, Weinstein was something of a child prodigy.
He took up chess at the age of 5, and by the time he was 16, he was made a National Master by the United States Chess Federation. He was the third-ranked player in the United States in his age group at the time. Around that same time, he was also the winner of a stock-picking contest sponsored by Newsday, beating out a field of about 5,000 students.
In 1991, he graduated from Stuyvesant High School, an elite school whose alumni include four Nobel Prize winners. On a side note the school recently refurbished its library, naming it the Boaz R. Weinstein Library.
Like any brilliant, mathematical mind, he began to become enthralled by the casino and more specifically, blackjack and poker. Weinstein was so good as a card counter that he was reportedly banned by Las Vegas’s Bellagio casino. He also played with the team for MIT that gained notoriety in the book Bringing Down the House.
As we talked about earlier, Weinstein first made a splash in the public eye back in 2012 when he took the other side of some trades done by a London-based JP Morgan trader that ended up costing the bank over $2 billion.
But in 2020, he was back in the headlines…
Weinstein spotted what he thought were severe mispricings in credit-default swaps (CDS). These securities are essentially insurance against a default, so they pay off when a company’s bonds are losing value. Weinstein noted that the pricing of credit default trades on dicey companies were priced the same as A-rated companies like McDonald’s.
So he began buying the junk bond credit-default swaps and selling CDS on investment-grade companies.
By the time the COVID pandemic hit, Weinstein and his investors were making a fortune. According to Institutional Investor, the flagship Saba Capital Master Fund spiked more than 80% in the coming months.
The London Whale bet made Boaz Weinstein famous.
The Credit-Default swap bet made him a legend.
And now, we have the ability to follow Weinstein into his latest bets… and a collection of some of our favorite areas of the market.
First, we have Closed-End Fund Arbitrage.
Weinstein’s firm, Saba Capital, became active in closed-end fund arbitrage back in 2015 and has become one of the leading players in the market ever since. The fund now has two hedge funds, Saba Capital CEF Opportunities 1 and Saba Capital CEF Opportunities 2, devoted to the strategy.
The firm also manages an ETF available to the public, Saba Closed-End Funds ETF (CEFS), that also invests in discounted closed-end funds.
A Note on Closed-End Funds (CEFs) Arbitrage
Closed-End Funds are like traditional mutual funds (referred to in this context as “open-end funds” because they accept investment continually, unlike closed-end funds that only accept investment at launch).
The biggest difference between open- and closed-end funds is the fact that open-end funds are purchased and redeemed through the fund’s sponsor and closed-end funds trade on the exchanges. And this difference is critical. Given that these funds can be traded, a fund’s shares are now subject to the fear and greed cycle that dominates the financial markets. When investors are worried or scared, they will sell their shares—and they are often willing to sell them for less than they are actually worth. As a result, the shares may trade at a discount to the net asset value (NAV) of the actual fund shares when enough investors sell.
You can check out our post exploring this strategy in greater detail here.
Now, buying deeply discounted closed-end funds is an amazing strategy. Simply, you buy a high-quality CEF that is trading at a discount and hope for the discount to narrow either through market dynamics or a large activist investor coming in and demanding the CEF do something to narrow the discount. While you wait, you collect a huge dividend.
But Weinstein and Saba take this idea to another whole level…
In addition to exploring closed-end fund arbitrage, Saba selectively pursues an activist approach under the same umbrella. The Saba team knows all too well that forcing certain corporate actions can be a highly effective tool to unlock shareholder value and monetize the discount to NAV.
The combination of these two investment strategies makes up one of my favorite investing blueprints of all time. Weinstein and his team have honed their craft in this niche market and are very good at it, having waged campaigns against dozens of closed-end funds from the likes of BlackRock, Wells Fargo, and Deutsche Bank.
Weinstein is a big investor in SPACs as well.
He has been active in this market for years. We remember him from back in 2006, when we first became very active in the space, and he owned about 17% of the SPAC marketplace.
Trading SPACs correctly is a high yield arbitrage strategy with a call option on euphoria if the market likes the deal made. We’ve covered this strategy in depth here.
At the 9th Annual J.P. Morgan/Robin Hood Investors Conference, Weinstein said:
“When I think of the value proposition of investors that are a little worried about inflation and having that duration risk, who instead can switch SPACs they not only can get in excess yield, but they also get a very valuable option on exuberance returning to the SPAC market or that the SPACs they happened to hold finding interesting acquisitions.”
Backdoor Access to Boaz Weinstein’s Hedge Fund
Saba and Weinstein used their activist approach to take control of a new closed-end fund target: Voya Prime Rate Trust.
It all started in 2019 when Saba announced a 5% stake in Voya. Since that time, Saba slowly increased their position to more than 20% of the fund. By May 2020, Saba was agitating for change and campaigning to replace the Board.
Saba eventually forced a special shareholder meeting and the shareholders elected to give Saba control of the fund.
The fund was renamed the Saba Capital Income and Opportunities Fund (BRW).
The shareholder meeting also voted to remove all restrictions on the types of securities the fund can own and strategies the fund can perform. For example, the vote removed the fund’s narrow focus on senior floating-rate loans.
Basically, the fund can own and trade anything they want just like the Saba hedge funds. Specifically, Saba Capital Income and Opportunities Fund (BRW) now states that they will opportunistically target other investments, such as closed-end funds and SPACs (the two methods we discussed above). The fund will also use derivatives where it believes it can achieve attractive risk-adjusted returns.
That means that Weinstein and his team can use the same three-prong approach (SPAC arbitrage, closed-end fund arbitrage, and tail risk opportunities) that he uses in the hedge funds available only to those with seven figures or more to invest.
The Saba Capital Income and Opportunities Fund (BRW) currently trades at a discount to the NAV of the securities and cash they own of nearly 9%. The fund pays a monthly dividend, and the yield right now is 12.00%.
This isn’t just an idea to invest in some good ol’ closed-end fund. No, this is the ability to “hire” one of the best-fixed income and arbitrage managers in the world today to manage a portion of our money.