Boaz Weinstein, the founder and chief investment officer of New York hedge fund Saba Capital Management, is taking up a fight against BlackRock, the world’s largest asset manager, over a group of closed-end mutual funds his firm invests in.
In a set of tweets this week and documents filed with the SEC last month, Weinstein accused BlackRock of corporate governance failures and poor portfolio management. He alleged that the asset manager tried to block outsiders like Saba Capital from gaining board seats at some of its funds and effecting changes.
Saba Capital owns shares in three BlackRock closed-end funds: the BlackRock Innovation and Growth Term Trust (BIGZ), BlackRock Capital Allocation Term Trust (BCAT) and BlackRock ESG Capital Allocation Term Trust (ECAT). Weinstein is advocating for changing these funds to open-end ones so that he can cash out Saba’s shares in them for a profit. It’s a common strategy in a closed-end fund arbitrage, where an investor seeks to profit from the difference between a fund’s market value and its net asset value, or NAV.
What is a closed-end fund?
A closed-end fund is a type of mutual fund that issues a fixed number of shares through a single IPO. After the public offering, no new shares will be created and therefore no new money will flow in. In contrast, an open-ended fund, such as most exchange-traded funds (ETFs) and mutual funds, issues new shares and sometimes buys back its own shares on demand.
Because of its structure, a close-end fund has more predictable management fees and offers investors an opportunity to invest in a focused portfolio that meets their specific needs. Many municipal bond funds and some global investment funds are closed-end funds.
Like an ETF, a closed-end fund holds securities and is listed on stock exchanges. It can trade either at a premium or discount relative to its NAV depending on market demand. When a fund trades at a deep discount, an activist shareholder like a hedge fund may get involved, hoping to buy stakes in the fund at a discount and simultaneously sell them at NAV.
That’s what Weinstein is trying to achieve at two BlackRock funds in which Saba Capital invests in: BIGZ and ECAT. He has been pushing for new board members at these two funds, who will have a say in changing fund structure. Ahead of the two funds’ annual shareholder meetings on July 10, Saba Capital asked for their shareholder lists so that it could solicit votes, but BlackRock intentionally blocked the process, Weinstein said.
“BlackRock rejected our request, and used the list for their own solicitation,” Weinstein tweeted on July 11. “The result? Neither fund reached a quorum, and both meetings were adjourned. This is not how nearly every manager has behaved in the same situation.”
Saba Capital invests in many closed-end funds. About 46 percent of the firm’s flagship fund is invested in closed-end funds, Weinstein said at the Bloomberg Invest conference in New York last month.
“What they are doing to entrench with respect to stripping shareholder rights, banning shareholder proposals which they’ve done, puts them at the G side of governance as the worst company in the S&P 500,” Weinstein said at the event.
In a statement last month, BlackRock said Saba’s real interest is not in governance, but short-term profits. “Its playbook involves disrupting the investment objectives and strategies of closed-end funds by seeking to force tender offers, open-endings or liquidations to enrich itself at the expense of other shareholders,” the statement read.