For all of Boaz Weinstein’s genius, he did not foresee this particular type of mayhem.
Instead, late last year the youthful-looking credit whiz was methodically scanning databases of bonds, swaps, and indexes on the 58th floor of Manhattan’s Art Deco Chrysler Building, where Weinstein’s Saba Capital Management has its offices.
Among the empty coffee cups and water bottles, the hedge fund manager was noticing anomalies that often spell opportunity in credit markets — the side of the investment universe where Weinstein plies his craft.
Neither he nor his partners had an inkling of the coronavirus pandemic that would eventually tear through the world’s economies, devastate its credit markets, and extinguish more than 400,000 lives.
But what Weinstein saw was, he says, “crazy.”
Prices for high-yield credit-default swaps, or CDSs, on dicey companies like United Airlines Holdings were cheap — the same as those on gilded, investment-grade companies such as Verizon Communications or McDonald’s Corp.
“I was seeing the most incredible mispricings I’d ever seen,” said Weinstein in an extended telephone interview with Institutional Investor in mid-May, the first of two. “I’m still not over how ridiculous it was.”
Saba began buying the inexpensive CDSs, which are insurance against defaults, on some of the junk-rated companies. At the same time, the fund sold CDSs on investment-grade companies at similar prices.
As Weinstein describes it, the basic wager was a simple one, even if tough to implement.
The spreads of the junk and investment-grade CDSs would almost certainly revert to their historical means. The prices of junk bonds would tumble in the next economic downturn, sending the prices of the swaps Saba held soaring. The investment-grade swaps would remain stable or possibly rise, with the premiums Saba received helping to pay for the monthly cost of the trade.
So Weinstein waited for the correction he was sure was in the offing. “It was not then about Covid,” he emphasizes. “It’s not that we foresaw this human tragedy.”
Nevertheless, the trade would arguably be the greatest of Weinstein’s fabled career.
In late February, utter pandemonium began to unfold. As ambulance sirens wailed and the corpses mounted in makeshift morgues and trailers across New York City, the profits from Saba’s trade just climbed and climbed.
For just the first two weeks of March, the flagship Saba Capital Master Fund spiked 33 percent, according to a note sent to investors that was reviewed by Institutional Investor. A second offering that was designed specifically to benefit from steep market selloffs, the Saba Capital Tail Fund, was up an astounding 99 percent. Even a third, hedged Saba strategy that seeks to profit from arbitrage in the closed-end fund market lost only 1.5 percent, while the S&P 500 tumbled more than 7 percent.
Despite this apocalyptic backdrop, the trade was vintage Weinstein, producing an outsize gain for Saba while risking a small amount of capital. “Asymmetric payoffs in the credit markets,” he says. “That’s really our funds’ focus.”
This year through May, the Saba Capital Master was up more than 80 percent, according to a person familiar with the fund.
Every market crisis vanquishes a swarm of speculators. But it also lifts a chosen cadre to exalted status based on their ability to sidestep doom and wring lucre from others’ misfortune.
Jesse Livermore made millions amid the wreckage of the 1929 crash. Jim Chanos cashed in as Enron Corp. unraveled during the dot-com collapse of the early 2000s. And John Paulson sifted through mountains of housing data before wagering on the subprime crisis, making billions for his investors and himself.
Now, Saba’s founder has joined that rarefied club. And he’s not entirely happy that you know that.
Institutional Investor declined to agree to the terms. Weinstein, after all, has been publicly producing outsize payoffs that have wowed Wall Street traders for years.
Hired at age 24 by Deutsche Bank, the ace blackjack player mastered CDSs as their popularity exploded, and over a decade churned out billions in profits for the German bank. Following steep losses during the financial crisis, Weinstein and a dozen colleagues packed up and left Deutsche to form Saba Capital Management.
Fame followed. Beginning in 2011, he bet against trader Bruno Iksil — the infamous London Whale — who was unloading protection on a CDS index using billions of dollars from JPMorgan Chase’s chief investment office. Weinstein, sensing opportunity, bought CDSs on the index, reportedly earning between $200 million and $300 million for Saba and, together with other traders, ultimately handing JPMorgan a stunning $6.2 billion loss the following year. That’s when Saba’s assets peaked at $5.6 billion.
It also turns out the native New Yorker is a savvy marketer. Saba’s foresight in packaging the tail-hedge strategy as a distinct fund, one with the potential for eye-popping returns, has attracted rapt attention. The firm pulled in $500 million of capital as of mid-March. Weinstein is capping inflows at $1 billion at his flagship and tail-risk funds for the year.
Weinstein’s fame is such that Adi Sunderam, an associate professor of finance at Harvard Business School, has written a case study on Saba. He says separating the tail-hedge fund from other strategies was “a smart move,” one validated by recent events.
“Both you and your investors need to have a little patience,” Sunderam says about such strategies. “It also requires a little trust.”
Patience and trust are attributes so-called credit relative-value investors, like Saba’s, have needed in recent years. Such funds may bet for or against bonds and indexes, arbitraging them, or snapping up senior debt, for example, while shorting junior debt or a broader index.
Recent performance for these funds has disappointed. This year through May, an index that tracks them lost 5.2 percent, according to Hedge Fund Research, compared to gains of 6.5 percent for the broad Barclays Capital Government/Credit Bond Index. For 2019, the relative-value funds gained 7.4 percent, trailing the 10.1 percent gain of the bond index.
Investors have yanked assets from relative-value funds every year since 2015, including the first quarter of 2020, according to Hedge Fund Research. Outflows totaled more than $22 billion during that span.
Weinstein cites an unlikely culprit for such trends: ex-European Central Bank president Mario Draghi. In July 2012, Draghi vowed the ECB would do “whatever it takes” to protect the battered euro. Credit volatility dissipated, robbing funds like Saba of a bread-and-butter profit generator.
Since then, relative-value funds have flagged. “All these credit relative-value funds have shuttered,” says Harvard’s Sunderam. “Saba has proven pretty nimble.”
Weinstein introduced the tail-risk strategy in 2010, setting it up with a separate fund. Responding to clients, the firm rolled out a “carry neutral” version this year in which the premiums received from selling investment-grade CDSs in the strategy are used to pay the cost of the high-yield credit protection.
In 2015, Saba introduced a fund that invests in closed-end funds, or CEFs, quarterbacked by partner Pierre Weinstein (no relation). Unlike their more common mutual fund cousins, CEFs issue a fixed number of shares when they go public. Shares trade at either premiums or, far more often, steep discounts to their net asset values, or NAVs. Activist investors like Saba buy stakes in discounted funds and cajole management into taking steps to reduce the discount by making tender offers for shares at NAV, converting or merging into open-end mutual funds, or liquidating.
Weinstein confesses he likes the moral dimension to his activism. “It gives me a great deal of pleasure that there are thousands of little investors who benefit,” he says.
Oddly, for the cut-throat world of big egos and sharp elbows, nearly everyone who crosses paths with Weinstein seems to . . . like him.
“He was this great combination of super polite, humble, and smart,” says Ron Tanemura, who okayed hiring Weinstein at Deutsche in 1998.
“A real gentleman,” adds David DeLucia, a former Goldman Sachs partner and chess opponent.
Weinstein’s father, Stanford, ran a car insurance brokerage and his Israeli mother, Giselle, worked as a translator — fluent in English, French, Hebrew, and Polish.
Summers were often in Israel, visiting grandparents, Holocaust survivors. His grandfather, or “saba” in Hebrew, rescued 20 fellow Jews during the war.
At the Manhattan Chess Club, Weinstein became a national master at age 16. He graduated in 1991 from the elite Stuyvesant High School, whose alumni include four Nobel Prize winners. Some years ago, the school refurbished what is now the Boaz R. Weinstein Library.
At the University of Michigan, Weinstein majored in philosophy and had an affinity for Aristotle, Descartes, and Hume, according to an interview with an Israeli news website.
Another, more lucrative area of focus: blackjack, whose mathematical probabilities played to Weinstein’s strengths. Las Vegas’s Bellagio casino banned him as a card counter.
Wall Street beckoned. Weinstein spent summers at Goldman Sachs, the firm where his older sister, Ilana, worked.
At Goldman, his mentor was DeLucia, then head of corporate bond trading. Weinstein, DeLucia says, just soaked up the markets’ ins and outs. “You can tell there are people who just can’t get enough of what they are learning,” DeLucia says. “Guys like Boaz learn the basics — and then they are inquisitive.”
Another Goldman co-worker was Appaloosa Management’s David Tepper. According to The Alpha Masters, Tepper would razz Weinstein, in part because of his chess playing with DeLucia.
“I used to be like, ‘What the hell’s this guy doin’ here? Why’s he hangin’ around?’” Tepper recalled in the book. He tasked Weinstein with looking up answers to the impossibly obscure trivia questions he would toss out to colleagues to pass the time.
After college graduation, Weinstein headed to Merrill Lynch in 1995 and two years later to Donaldson, Lufkin & Jenrette.
By 1998, the white-hot Wall Street product was the CDS. Deutsche wanted in and was hiring in droves. Weinstein fit the bill.
Tanemura, then Deutsche’s head of global credit derivatives in London, signed off on the fateful hire. “He had instinct and scrappiness combined with a quantitative strategic mindset,” says Tanemura, who put Weinstein in charge of U.S. corporate derivatives. “He was clearly one of the young star traders.”
The newfangled CDSs, which pay off if a company is downgraded or defaults, brought the credit markets more liquidity and new strategies. Weinstein was early in realizing that CDSs were an efficient way to short in the credit markets.
Weinstein was soon running a number of credit-related desks, overseeing scores of traders and other staff. He also led a proprietary trading desk named Saba, after his grandfather.
Weinstein was not unaware of the irony of the grandson of Holocaust survivors making gobs of money for Germany’s largest bank. In an interview, Weinstein said he made a point of giving Israelis applying for positions ample consideration. Many joined.
Deutsche certainly didn’t mind. In 2000, at age 27, Weinstein became the youngest-ever Deutsche managing director. In addition to his trading prowess, Weinstein was skilled at explaining trading tactics — something that helped persuade the bank to fund him with billions of dollars.
Said former Deutsche co-CEO Anshu Jain in a 2017 interview with Institutional Investor’s Alpha magazine: “He’s a master of the narrative and that’s one of many skills that stood him in good stead.”
Saba generated hundreds of millions in profits annually as the bank shoveled money to the bond whiz. According to a person familiar with the bank, of the 44 quarters that Weinstein worked at Deutsche, he turned a profit in 40 of them.
But during the financial crisis, the bill came due.
Saba’s relative-value trades went awry, as did so much across the credit markets. The desk lost $1.8 billion of its $10 billion in allotted capital in 2008.
By 2009, banks scrambled to cut risk and Weinstein departed with a dozen or so traders to start his hedge fund. It had just $160 million or so in assets, a pittance, with which to rebuild its fortunes.
Today, far below its $5.6 billion asset peak and chastened by the volatility drought, Saba manages a more modest $2.7 billion, divided among the three strategies: credit relative value, tail-risk hedge, and CEFs. Saba’s flagship fund participates in all three. The tail-risk funds come in two varieties: the original and a “carry neutral” version. The CEF funds come in both hedged and long-only varieties. A $46.5 million publicly traded ETF also employs the CEF strategy.
“People find our strategies interesting,” says Weinstein. “They are not off the shelf.”
Saba is a boutique, with 30 professionals. In their 58th floor office, they track 600 CDSs, looking for aberrations in the market to profit from. The crew tracks a dizzying array of 18,000 bonds as well. But if Weinstein had his way, that would probably be all you’d know about his money machine.
Unfailingly courteous, a gregarious regular on the charity circuits, and exceedingly social, he is suddenly dialing back his public exposure even while his firm’s successful strategies are turning heads up and down Wall Street.
It’s not difficult to fathom why: Weinstein is focused on trading, so what possible benefit can come from showcasing anything else against today’s backdrop of a devastated New York City?
For the record, in 2010 Weinstein married Tali Farhadian, an Iranian-born general counsel for the Brooklyn District Attorney’s office whose resume includes stints as a prosecutor for the Eastern District of New York, counsel to former U.S. Attorney General Eric Holder, and law clerk for retired Supreme Court Associate Justice Sandra Day O’Connor. She graduated from Yale University, where she also got her law degree, and received a master’s in Oriental studies from Oxford University, where she was a Rhodes scholar.
The pair reside in an Upper East Side apartment that belonged to the late, reclusive copper heiress Huguette Clark and was purchased by the Weinsteins to great media fanfare in 2012 for $25.5 million.
Among other charities, he has held active positions at the Robin Hood Foundation, the Stuyvesant High School Alumni Association, and Natan, a nonprofit focused on Israel and the Jewish community. In 2018, he penned a New York Times opinion piece criticizing New York Mayor Bill de Blasio’s efforts to loosen admissions standards at his beloved Stuyvesant High School. The Weinsteins in May told Bloomberg News they were contributing $2 million to nonprofits addressing domestic violence amid the Covid-19 pandemic.
But ask him about anything personal, and Weinstein’s charming obfuscation emerges: Though he chuckles about it, Weinstein won’t reveal his date of birth, and when asked about his height the diminutive card shark chuckles and answers “6-foot-7.”
But back to investing. The forces behind the fixed-income dislocations that proved so profitable for Saba are not complicated, Weinstein says. They derive from simple market imbalances — specifically an oversupply of CDSs on high-yield companies.
The popularity of one swap benchmark — the CDX High Yield index — is to blame, he says.
The CDX index is very liquid, trading $10 billion a day in 2019, says Weinstein. That, he adds, is because popular so-called risk-parity hedge funds sell high-yield protection on the index for quick, one-stop exposure to the junk-bond market.
A disparity developed because of a paucity of buyers for such protection — that is, purchasers willing to take the other side of the risk-parity funds’ bullish high-yield wagers.
Banks, historically buyers of high-yield protection, have scrambled to lower their risk profiles in the era of re-regulation. “There was little demand,” he says. “There was a lot of supply.”
The result? Weinstein points to Sabre Corp., which provides computer reservation services to airlines, a business walloped by the Covid-19 crisis. On February 12, the company’s benchmark bonds, then rated BB by S&P, were trading at just 0.22 percent, or 22 basis points, above Treasuries. The investment-grade BBB+ benchmark bonds of McDonald’s, by contrast, were trading at 23 basis points.
By late May, Sabre’s bonds traded at 700 basis points above Treasuries, Weinstein says, though they have since tightened somewhat.
While the market was collapsing, Weinstein says he focused on the chaos in front of him. “Every day is a year,” he says. “When I was in the middle of it, I really was totally engrossed with opportunity in the marketplace.” It reminded him of the turmoil generated by the collapse of Long-Term Capital Management in 1998.
Weinstein foresees more turbulence. “Every week there’s a default or missed payment,” he says.
Different credit-quality ratings within the high-yield universe have been affected differently.
Saba proprietary research shows incredible dispersion: The top 20 percent of bonds in the CDX index were trading at an average of just 46 basis points above Treasuries as of February 12 — a pittance. The bottom 20 percent were trading at a startling 2,274 basis points above Treasuries.
By April 30, Saba research showed the top-quality bonds trading at 117 basis points above Treasuries and the lowest-quality, presumably on the precipice of or in default, trading at 5,763 basis points above Treasuries.
The turmoil underscores that there’s additional profit likely to be generated in the tail-hedge strategy since credit spreads by mid-June had returned to pre-Covid levels. “There are still a lot of high-yield CDSs that remain very, very tight,” says Weinstein. “In my view, the trade is nowhere near its late stages.”
And yet Weinstein’s focus is not entirely on the tail hedge. In addition to guiding Saba’s more prosaic credit relative-value trades, he’s doing battle with some of asset management’s most established — and well-resourced — players.
As far back as 2016, Saba targeted CEFs advised by BlackRock. It built positions in the BlackRock Credit Allocation Income Trust, the BlackRock New York Municipal Bond Trust, and the BlackRock Muni New York Intermediate Duration Fund, with combined market values of $1.36 billion trading at discounts of 10 percent over the years.
Saba lobbied for action to reduce the discount and proposed its own slate of directors to do so.
BlackRock responded by emailing a 54-page supplemental questionnaire for Saba’s board candidates. It was seen by some as an underhanded move, in keeping with many control battles: When Saba completed the questionnaire a week or so later, BlackRock informed the firm that the deadline had passed, and it would not include its insurgent slate in the proxy.
In December, BlackRock announced a tender offer for 10 percent of the shares of the Credit Allocation Income Trust. Last month, BlackRock announced it would merge the two remaining funds into an open-end BlackRock municipal bond fund, eliminating their discounts.
“We got a clear victory on all three funds,” says Weinstein.
In February, Saba and other CEF activists got a gift. Franklin Resources agreed to pay $4.5 billion for Legg Mason, which advises more than two dozen CEFs via its Western Asset Management subsidiaries.
Because the Franklin purchase represents a change of control, the CEFs’ investment advisory contracts are subject to renewal by a plurality of shareholders, according to the funds’ bylaws. Failing that, the agreements will lapse, and the funds will almost certainly have to liquidate at NAV.
Activist managers, including Saba, that already had stakes in some of the funds have added to their positions.
Now, Franklin and Legg Mason are in a tight spot. Saba is targeting the Western Asset Global High Income, Western Asset High Income II, Western Asset High Income Opportunity, and Royce Global Value Trust funds.
A positive outcome for the insurgents is almost certain.
In the activist game, playing rough is often a given. In May, Saba was campaigning to replace the board of Voya Prime Rate Trust, which recently traded at a discount of more than 13 percent to its NAV. Voya amended its bylaws, requiring a 60 percent affirmative vote rather than the previous plurality.
Saba filed suit in Arizona Superior Court against Voya’s board and its investment adviser seeking to invalidate the new bylaw. Stay tuned.
This year will likely be a good one for activism. “Because these funds handed investors significant losses in 2020, it will change investor behavior in terms of voting,” says the card sharp. “This year, we’re going to get even more voters more solidly on our side.”
However, he believes that U.S. equity markets reflect a positive, V-shaped economic recovery.
“I believe the V-shaped recovery priced into equities and debt makes little sense for [high-yield bonds] given the surging number of defaults with low recoveries,” he says. He calls the premise of a V-shaped recovery “questionable.”
For the probabilistically minded Weinstein, one key question is not where one suspects the markets are headed, but how certain one can be that a given outcome will come to pass.
“Every investor should decide when they are confident and when they are not confident,” he says. “Even if the Fed has your back, that doesn’t mean a lot of companies aren’t going to default.”
“The impact of Covid on markets is not something where anybody should be highly confident,” he says.
Saba’s lucrative tail-hedge trade will inevitably unwind as markets return to some semblance of normal. What then?
The varied trajectories of those who scored fortunes amid past bear-market turmoil offer little guidance. Paulson, for example, failed to repeat anything close to his great subprime gains, making an ill-timed wager on gold. But Kynikos Associates’ Chanos, who testified before the U.S. Senate about market reforms, continues to successfully target frauds, fads, and bubbles. Livermore, of course, committed suicide in 1940 in the cloakroom of the Sherry-Netherland Hotel on Fifth Avenue.
Don’t expend too much energy speculating on outcomes for the Saba trader. Like the chess master he is, Weinstein is already plotting several moves ahead. Says DeLucia: “He’s always looking for the next opportunity — and the next risk.”
