Lead-Lag Live

Unveiling the Hidden Realm of Closed-End Funds: A Dialogue with Boaz Weinstein

• Michael A. Gayed, CFA

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Ever wondered about the secrets of Wall Street? Get ready to navigate the intricate world of finance with industry legend Boaz Weinstein, who takes us on an exhilarating journey into the world of closed-end funds, bonds, loans, and curve shape. His intriguing story starts with an unexpected job opportunity at Merrill Lynch, which ignited his interest in Wall Street. From there, Weinstein's career skyrocketed, leading him to cross paths with big names like Warren Buffett and Ed Thorpe. 

Now, imagine that there's a hidden world of investments that's often overlooked, yet brimming with opportunity. Boaz offers his insights on why some closed-end funds are sold and not bought, and what happens when funds drop to large discounts. The conversation also explores the correlation between credit spreads, fund entrenchment, and discounts, offering insights rarely shared outside of the boardroom.

But it doesn't end there. We also delve into the intriguing concept of leverage and consolidation in investment funds. We examine how managers use leverage to maximize their fees and how the consolidation shift is creating larger margins for investors. Lastly, we explore the world of leveraged buyouts, their risks, and rewards, as well as their role in maximizing returns in the investment industry. So, buckle up and join us on this thrilling journey through the labyrinth of finance, brimming with stories, insights, and valuable knowledge every investor should know.

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Nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. 

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions. Don't forget to follow at LeadLagReport on Twitter to join these conversations live and check out the LeadLagReport at wwwleadlagreportcom. Choose promo code podcast30 for two weeks free and 30% off to get access to award-winning research and anticipate stock market crashes, corrections and bear markets. And now onto our LeadLag Live discussion hosted by Michael Gaiad.

Speaker 2:

My name is Michael Gaiad, publisher of the LeadLagReport. Joining me for the hour is Boaz Weinstein, who a lot of people consider one of the legends in the industry. I had a quick back and forth with Louis Vincent Gov, who I had on his face, and he said he met you number of times. He unfortunately can't make it, but with very commentary of your success and your skills. So this should be a great conversation. But for those who are not familiar with your background and your story, boaz, introduce yourself. Who are you? Are you interested and involved in markets and what are you doing? Growing Sure.

Speaker 3:

I assume everyone can hear me. Okay, this is my first time on Twitter Spaces, so hopefully my mom won't call in and all of a sudden everything will cock out. So I'm really glad to be able to speak to you all and for Michael to have invited me. Let's see. So I've been investing since I was a kid.

Speaker 3:

I got interested in the stock market when I was a teenager, almost through osmosis. I had a bedroom that was a split living room Bedroom where my parents put up a makeshift wall and I would listen to Wall Street Week from a young age. I think it was on at 830 and I would go to sleep hearing Louis Ruekeiser soothing, dulcet tones, and so I wanted to work on Wall Street and I got super lucky At first. I was lucky that I was not exactly looking for a job in high school, but sort of looking, and there was a job opening at Merrill Lynch on with one of the best mother daughter broker teams in the history of Merrill. Actually, the mother on her own was a top 10 broker at us whatever it was at the time 14,000. And I got to come in and do clerical stuff. So I was able to leverage that and my interest in Wall Street into learning a little bit and getting Goldman Sachs to actually agree to have a perfunctory meeting with their recruiting person for summer jobs, and normally they recruit junior years, maybe sophomore year. I was. I was freshman and it was perfunctory, but I got super lucky on my way out where they said come back in two years. Maybe we're in the men's bathroom at the Sakes. I've ran into someone that I had met at a Cheskel that had brought some of the world's greatest players, not just world champion at the time, kasparov, but even Mikhail Tal, just like this unbelievable thing that was at Millbank Tweed. The law firm and partner there, bob Rice, really helped change chess about 20 years ago, or certainly tried to, and there was a Goldman partner there who played some games with me, actually has the incredible collection in Connecticut of artifacts from the game going back to the 15th century. So he set in motion basically three rounds of 20 to 25 interviews of math puzzles and personality tests and what have you?

Speaker 3:

And the short story is I got the job and we're not for that one little moment. I mean I think all of you you think about things that went really well in your career or really not well, it often can come down to small moments that didn't need to be and you can try to create extra optionality to make more of those moments, more lottery tickets, that moment, by me trying, and then the luck, and maybe say, well, I should have, I should have approached that guy from the start, but anyway, we found each other. The rest is history. I got to work as an 18 year old, 19 year old, on a desk of six people. The five others were literally, you know, at the time it was just a guy called David Tepper, who now is you know the David Tepper and and Jonathan Colatch and you know Jim Zelter, bill Troy and David DeLuce, the partner who made everything possible for me.

Speaker 3:

And I was six and I got to learn an incredible amount and I knew then that credit at the time was very focused on the accounting, the deep, fundamental analysis, and that would not be my highest and best use. I was more quantity. I went to a math and science high school and was looking for something more quantitative that was still micro. So in the fixed income worlds where I got this lucky job, I was planted and and I was waiting for credituratives to be born and 1998, they was when I was among the first, if not the first, credituratives market maker slash proprietary trader. You know, not someone who was just billing orders for the bank and that's been my domain expertise. It still is.

Speaker 3:

A lot of the things we do here are offshoot. It's not just credituratives, it's credituratives and their relationship to bonds, to loans, the shape of the curves where we can borrow from how to think about curve shape, from macro markets and credit against equity. And then I hope we get to talk about this a lot, michael, but for the last decade, closed in funds have fascinated me. Greater, much, much greater investors have come before me, like Warren Buffett and Ed Dork, which hopefully we'll get to some stories about them and me and closed in funds. But that is what I received a lot of incomings for today's Twitter spaces and I'm so glad to be doing this to go into some detail about how we look at it and what's actually happening with some of the fights.

Speaker 2:

I think it's interesting how somebody grows up impacts when ends up being their ultimate direction for career choice, in the sense of, I would say, small moment, optionality, a lot of tickets and, if you just try right and get, transition to the closed in fund world, because if you're trying to take advantage of these discounts you have to try to affect change. So maybe for the audience, explain what a closed in fund is. Let's go very basic first. It's not familiar because it's not as well talked about as it used to be, and what makes that space particularly interesting for you with Saab?

Speaker 3:

Yeah, so a closed in fund is a registered investment company. A few hundred of them trade on the New York Stock Exchange. To pretend about public closed in funds, there's the London Stock Exchange, australia, canada Between those four regions alone we have about 750 plus funds. They do different things. They invest in US equities, but with a wrapper or with a vehicle listing in Australia, or municipal bonds or taxable bonds or loans, or opportunistic in fixed income or EM and on and on. If there's demand for it, blackrock will sell it. There are ones that are focused just on with an ESG label, ones that are just technology stocks. So it really is, in a sense, a excellent way for investors to get one stop shopping, exposure to a great manager in some cases, and then, because of the closed ended nature, which is really where the maybe there's useful to very simply explain it. It's just like a regular stock where if you want to sell it, you have to find someone to buy it. Now the ETFs or mutual funds that everyone here knows well are different. Because you want to get out of your mutual funds, of course you're calling the company, you're not trying to find someone to buy it, and you're getting that all the time, exactly now, if you're getting cash, they're giving you, they're cashing you out at now. In an ETF though there could be little slippages, where it's slightly above or below, and maybe people like Jane Street or Goldman Sachs are keeping it in mind Maybe any ETF is tethered to Nav and if it's not, you may create or redeem shares, so the share count changes on, like a closed end fund or a stock that didn't do a secondary, and so, again, you can always get out at now. So there's this idea of you always can get what it's worth. You may not like how the manager did, but you can always get what it's worth. With closed ends, sometimes you can't get what it's worth, sometimes you can get more than what it's worth. So we may talk about closing funds, trading at a premium, and so, with all of that, I think what's super neat about it is that is the discount or premium, because they're unlike normal investments in the market, where you know you think Nvidia is going of 500 and someone else thinks it's going to 300.

Speaker 3:

And there are sharp disagreements over what the value ought to be. Today, at least with closed end funds, you have simplified the type of analysis you're doing when it comes to trying to find value in closed end funds, you might say I think this manager is a good manager, I think this other manager is better, but their fees are too high. You can make those distinctions, but if there are funds as there are today, about a quarter of the funds that are trading at a discount to their objective now, like we can use the closing price on the New York Stock Exchange or however the bonds are marked off of the last trade, and exactly the same way for mutual funds and ETFs. We know what Nav is and there's a discount. That is a discount that is more significant than what a reasonable investor would expect to earn from taking all sorts of risks. So you buy closed end fund at, let's say, 84 cents on the dollar. That distance 84 to 100, if it became an open-ended fund it would go straight to 100 when stopped there, when stopped at anywhere other than 100 or 99.

Speaker 3:

And that gain from 84 to 100, I think everyone can do them out. That's about 16%, that's almost 20%, it's 19.x%. And to make 19% where you know it, you don't have to be right about the next quarter's earnings. The portfolio will fluctuate up and down and if you're a long-only. You will be exposed to that. But they're often super diversified and if you are using open-ended funds because you want to hedge it out, you want to do an arbitrage or you're hedging it name by name. You become only exposed to is that discount going to grow or shrink?

Speaker 3:

And when I think about the path to Nav, that kind of gain a 19% gain, if it took a year, if it took eight months, if it takes a year and a half, for the risks one is taking, is amazing to me. It's amazing to me because it's an arbitrage, the only one I know where I can actually control the outcome, because I and the other let's use a technical term pissed off shareholders who are like why is this thing at a 16 discount and it owns California municipal bonds? It's not because it owns weird private equity, it owns California meetings, it's run by a venerable manager. Why is it at a 16 discount? There is a clear and easy path to making investors a 19% gain solely through the right of shareholders to elect a board that cares about shareholders and open-ended fund. So I'll pause there and see if you want to redirect me into something.

Speaker 2:

Yeah, that was great. From my perspective, there's always been two interesting aspects of closing funds. So one is the one you just mentioned, that these discounts you can arbitrage or try to arbitrage them away and not take on necessarily beta risk or whatever risk the asset class has, that you're trying to close the gap one. The other part of this on closing funds is I've seen studies that would suggest that if, for example, there's a number of closed-end equity funds that are blowing out in terms of their discount, meaning getting some really severe discounts, it almost gets seen as a almost like a criterion signal on the asset class because you end up having a discount being so large because people are selling against the NAV, which causes a dislocation which tells you that you're probably at an inflection point just from an investor sentiment perspective. That to me, I don't know if that's anything to do with the way you look at closing funds, but is there any message or signaling when it comes to how wide that spread tends to be across that swath of closing funds?

Speaker 3:

Yeah, we didn't pre-race any questions in advance. That is a phenomenal question. I'm not trying to pander to you, because there are two really subtle takeaways. When you wonder why are some funds at a big discount, why are some funds not at a discount or even at a premium, it's obviously very cavalier to say more buyers and sellers, and there's a thing about them which is that this was said to me by a man that I think is a great man, a great guy, a great civic member of the community, the president of BlackRock, rob Capito. When I went to visit him the first time the only time, actually, we've talked about closed-end funds. We've met other times he said you got to understand these products are sold, not bought. I just want to explain that. Then I also want to get to these two things about what makes a big discount and what makes a premium. What does that mean? A lot of you have heard that expression sold, not bought. These products are sold, not bought. He said look, people call their broker and they say get me Amazon stock, I need to get me Nvidia. No one ever really calls and says get me the latest closed-end funds. Why would you do that? The way these things are consummated if they are sold, not bought. The broker, the RIA, says you wanted California Minis or you wanted US equities. Here's a great manager. They are launching this vehicle. Yeah, the fees are okay. Maybe they're a little high but I think it's worth it. They're sold.

Speaker 3:

There isn't natural demand at time zero. There's acceptance. Of course I'm speaking a little bit in generalities, but it's basically there's never demand at NAVs because they're often going to go to a discount and the only people that want them at NAVs are want them because of someone else telling them you should buy this. Rather and they're often the least sophisticated investors, not to offend anyone here that has bought it they closed in fund at IPO. They're often the least sophisticated. They used to have with them effectively 5% loads where you buy it at NAV but 5% of the cash would go to pay the commission to all those deserving salespeople that made it possible, and so you were in into 5% premium, even if the price was at IPO.

Speaker 3:

And so when? Because there's no natural demand, basically at NAV ever for most funds again, generalities when, finally, the IPO. Now, whoever BlackRock's on to the next fund, they're not. They can't raise any more money for that fund. It's locked in. They can't create new shares like they can for an ETF, and so someday they'll be natural sellers and that day, that for me, was the first day institutionally I got involved in closing funds.

Speaker 3:

I had owned a couple as a retail investor, learned about them in Barons subscriber, who often would talk about opportunities for retail, was really a retail product, but I learned about it because in Taper Cantrum, june 2013,. That's when they dropped to a big discount because there was a tantrum, there was selling pressure and, to my earlier point, no natural demand. They went from no discount or premiums to like kind of straight line to minus 10, minus 11, minus 12. Of course, there've always been funds at that level, but I mean and bigger, but I mean like a big swath of the market dropped 10% because there was supply and there was no demand, and so you can have that.

Speaker 3:

That can simply be a reason why they fall, because they were inevitably going to fall. But once they get to a big discount, then it starts to attract really smart retail. It starts to attract a few institutions and at some point, even an activist like ourself, but the two. So now let me get to, if it's okay, michael, the two telltale features about why a closed-end fund is going to trade at a big discount. Let's do that, okay.

Speaker 2:

Good yeah, I'm a fan, there's a lot of good directions.

Speaker 3:

I want to go with it, all right. So what are the two things that are most likely to cause the fund to be at a big discount? Now entrenchment first word is entrenchment a fund where the investor is powerless. Now I'm going to pick, actually, what I consider to be a positive example where I don't have criticism, I don't have bad things to say, but there's nothing to stop the fund from staying at the discount store a year or for a decade. There are ones where the entrenchment I do have a lot to say because they've changed the rules on you or they've done things that go against good governance.

Speaker 3:

But to give an example, because I get asked just about every three or four days what do you think of PSH? What do you think of Bill Ackman's fund? I'll tell you what I think of it. I think he was very clear that there would be no activism in his fund. He gave terms that made it enticing for people to switch over from the hedge fund feed terms and otherwise, and you just would not be able to tell the board through voting to change the rules because you never could get to 51% of the vote because he had special voting rights and that was known, that was right there and in bold for everyone to see. And so if we look at things that are at the biggest discount almost all of them the reason is our twofold and one of them is entrenchment, meaning no matter how much we buy, management is going to do something so that they basically say we don't care, we don't care that the board, it's not up to management. The board is supposed to work for shareholders but we don't care. We don't care about your vote, and I'm going to give you an example with Franklin Templeton fund, emo, in just a bit. But the reason I'm not negative on that reality that his fund sits at a 37 discount is that I think he's done a whole lot to erase that discount, or at least seemingly so. Like if you said, okay, but did you know that he's bought back a quarter of the shares, not 2% of the shares, a quarter of the shares Actually, I think it's even slightly more if you add up other senior people at the firm. Like at some point, this selling imbalance so why are things at a discount? More sellers and buyers? At some point that selling imbalance can get cleared up and someone could say, wow, I get to own. Actually a really interesting, impressive manager said ups and downs but over the long haul has done really well and I have it at this giant discount and it already had discounted fees. But it is for to be clear, it is there because there's nothing anyone can do about it and there's more sellers than buyers.

Speaker 3:

On the less positive side let's, you know let's there's stuff like if management says I know that the board, or if the board says we are here working for shareholders but it turns out that actually we're going to violate the 1940 act. We're not going to let large shareholders vote all their shares If you have more than 10 percent. We're going to employ a share control provision that a certain state law allows us to, in clear violation of the federal law passed in 1940 that says every share gets to vote. We don't know which law is right. Is it the state law or the federal law? Well, this year in a case in the Southern District of New York, new Vieng law in summary judgment against Saba Capital on this exact issue. Any funds where their main business is set up in New York would look at that and say, okay, I guess the judge has been very clear. Summary judgment Saba wins, new Vieng loses, probably we should let them vote their 13 percent of the shares, but some managers have chosen to basically pay a lot of legal bills to delay delay and we've had a lot of success in the courts, but entrenchment can lead to discounts.

Speaker 3:

I mentioned that I was going to say, franklin, you could look at a funds EMO, edward Mary, orange, where this year, we got something like 64 percent of the vote. We would have had 70, but they tried to trick not a trick. They decided to borrow money through preferred stock, to issue preferred stock instead of for their leverage, instead of using bank lines. That preferred stock carries a vote, and they issued it to someone that would vote for them. Perhaps, instead of us getting 70, we only got 64. 64, we got 64, but they had set up rule that say that if we don't get over 50 percent of all shares, not just the ones that vote Imagine, in US presidential election, literally 100 million people sit at home and don't vote those votes go to the incumbent. Those things have been. These are not things that are done in corporate America. They're only done on the public closed-in funds, and they're only done because the manager is basically, though, resistant, in some cases because they want to keep the funds in closed-in form. They don't want it to be a mutual fund or an ETF, because the stock market will value them at a lower multiple if the money is daily liquidity instead of semi-permanent.

Speaker 3:

I talked about entrenchment. If activism is not going to work or it's going to be a lot harder and there's remedies, for even EMO won't give it all away on this, but if that's not going to work, it deserves to be a big discount because, by the way, these funds are often also disappointing. In EMO's case, they own MLPs and energy equities and they're using leverage. I think a fund that has underlying exposure of energy equities is much more risky than California communities, and I think you all would agree. The problem is with the leverage and with what happened to oil in 2020, they had to sell at the bottom. They hit a level where they had to basically liquidate the leverage at the bottom. This happened in 08 as well. These funds, when those things happen, can never again beat their benchmarks because they had a levered loft into a giant sell-off and investors should be an artist off, and that's why the discount's there, and then they add insult injury employee tactics. Though I mentioned entrenchment.

Speaker 3:

I'll be more succinct, but you can get a lot more questions than me. The second thing which I think is really interesting so you wanted something where you could get a takeaway for is there a broader signal to the market? Here it is. Michael, if you map close-in funds that have 100% public holdings so IBM, at&t, stock, whatever bonds and map and do it all the way down to close-in funds that have 100% private holdings, I think all of you know where I'm going with this.

Speaker 3:

There are some funds, largely in the UK, that have private equity.

Speaker 3:

There's also funds of private debt, but private equity, and there are some funds.

Speaker 3:

The more private you have, the bigger the discount is, the more uncertain what it's worth is the more inability to hedge it. If you wanted to hedge it because it's private, is they're at discount. So the largest closed-in fund in the world, the Scottish Mortgage Trust, smt, on the London Stock Exchange SMT 9 billion plus pounds trades at a 22% discount and it has 20 or so 20 to 22% privates. And those privates are not even ones that I think are necessarily hard to value, like FaithX is the biggest holding that one's super easy to value. But I think the takeaway with the market is saying is like you heard the noise about when people said, oh, did Tiger Global mark their private book down enough last year? Is the market is saying we don't believe the valuation of privates and so we're going to penalize those funds. And so that's, I think, really interesting. At the moment. There's even a fund we bought. There are funds we bought recently, let's say, that are at a discount to now between 30% and over 50% because of the private problem.

Speaker 2:

Yeah, I know that that actually is very cute. By the way, if everybody's here, please make sure you follow BoAtheWinest on Twitter. And again, I know a lot of people want to come up and ask some questions. They'll try to circle around. I want to relate that to the name of the Twitter space around credit risk and the market end game. I know that sounds dramatic, but yeah, I'm going to make you assumption that discount variability is also a function of just market dynamics and volatility in general, because it tells me all about uncertainty. Is there a link between discounts in the closed-end world and credit spreads widening? Is there any kind of signaling that comes from that standpoint? Because that's where I saw a number of people were asking me questions when I announced the space about your thoughts on credit spreads being tight or not, and I have to assume there's some kind of link.

Speaker 3:

Yeah, there often is a link. You find there's a pro cyclical reality to when closed-end funds are at big discounts, people want it to sell them. When do people want to sell them? When there's fear in the market? This is actually a really weird year because we're buying closed-end funds on average at a discount that is more or less where they were in March 2020 when they plummeted because of, of course, covid not the worst day of 2020, but, like you know, let's comp ourselves to one day in March, the discount is the best discount we've ever been able to buy at. That's why we own over $3 billion.

Speaker 3:

We, two years ago, only own $650 million, and markets are up and credit spreads are tight, and so I think that relationship, michael, is very loose, but it's also not a great time to talk about it being anything but loose when you have a world where the market's rallying, credit spreads are tightening despite a rising default rate, tightening lending standards. You know a regional bank crisis that maybe isn't a crisis anymore, but it certainly is not going to make regional banks interested in sticking their neck out even more in private lending, and you know this recession that never seems to be in front of our nose. You know it's in the distance, it's always six months out. People are kind of tired of waiting and they're looking at good news, like today's CPI, and saying I can't, I just can't be, I can't not be long, like we have this culture of I can't not be long for for more than six months. I tried it, I got worried, and now I can't beat them, join them. Look at, you know it's all about AI, and so you know they're foregoing the five, five and a quarter on its way. Five and a half maybe higher risk free rate to say, I need, on top of that, to own high yield credit. And so, though I've been getting from some of our investors, you know, some pieces. I put them out on Twitter, for I really do the that world of being able to communicate our thoughts and ideas, and I've gotten some nice feedback about it. I don't know if I have 5% the following you do, michael, but so I'm not very good at figuring out how to do that. But when I see so many pointers that say, despite all the cheer, with low credit spreads, low vol and rising default rate and that backdrop, that they're, they're ought to be, they're ought to be more risk embedded, but the closed end fund risk. The discounts are big everywhere. They're big in MLPs, they're big in munis, they're big in inequities. So so I don't see a signal from closed end.

Speaker 3:

I do see, I do see increased demand for CDS from banks, which is no surprise after Silicon Valley bank like, for example. I mentioned at the top that we're very involved in CDS. You know, I've been in the CDS market for 25 years. I can't remember a time now maybe there was, but I can't remember a time where there was real demand for someone to buy protection on Apple computer, and it happened when I was in London just a couple of months ago, a month or two after after Silicon Valley bank, cds and Apple computer. Obviously it's worthless. Obviously it is ultimately worthless. What is the point? And so I want to, I want to use Apple as the way to make this point. I could have picked IBM. I could pick a lot of other amazing companies, abbott Labs.

Speaker 3:

The point is the banks make the loans. The loans are made for relationship reasons. The bank's not going to get rich letting money to Apple computer. They might get some M&A assignment. They might get some you know all the different things to service one of the greatest companies in history. But the but they. What they do not get to do is tell their regulator this should be 0% risk, weighted Obviously, it's zero risk. So don't make us hold any capital. They have to hold an amount of capital. There's the regulatory amount. There's, for their risk models, the risk amount. And if they buy CDS and this is not just US companies, us banks, this is European banks as well, whether it's different kinds of tests Basel, the Fed that if they buy the CDS, the capital is retrieved, so it's freed, and so for all of these stress tests, capital ratios, buying CDS.

Speaker 3:

Jamie Dimon said I'm bracing for a hurricane, and he did say that. What did it actually mean? Did he put on a raincoat and go hide in the basement or get a better umbrella? No, it meant that JP Morgan is actively de-risking. Well, where is the biggest risk in a bank? It is more in the credit market than in the equity markets, and I don't want to speak for mortgages and interest rates, but in credit, it what it meant, and it's much, much more in loans which banks make than their bond portfolio, which run dramatically after London Whale or after, you know, 2008. So, so, if they have these loans and these loans, which they do, and the loans are attracting capital.

Speaker 3:

And Jamie Dimon says I want to batten down the hatches. The cheapest way to hedge a billion, a hundred billion of risk is to buy protection on the best companies in the world because the cost is the least. So we are seeing a lot of demand on names that I have not seen before, or names we have seen before, but in much bigger sizes. Someone came to me last week with a demand to buy, or a desire to buy, 50 million of Google two-year CDS. So I look at that and I feel like, wow, that's my raw material Stuff that I feel is not arrogant to say are not going to defaults and they're not even going to get downgraded to below investment grade in the next five years. It's preposterous for that to happen to Apple or Google. I take that as my fuel and I go and spend it on CDS, on put options, on the VIX, on mostly CDS, on things that actually may blow out Now, maybe not default, but maybe blow out, and so that is.

Speaker 3:

I've kind of answered your question, while also describing how do I approach tail protection. I fund it with things that are safe, whether it was SPACs, which are really T-bills in a box, cash in a box. Before they despaq you get your money back, so that's safe. Ibm is safe and I go and short unsafe and that's been kind of my approach. But anyway, to answer your question, come back around in one sense we are seeing a lot of demand for CDS these last few months and I don't know if it's a signal of anything other than bank want to be prepared, they want more, they want to do better on stressors, they want to pay dividends, they want to buy back stock, but they certainly have seen how quickly a bank can fail and bring up capital to show that you would perform better, you have better ratios has been something that has been the biggest technical trend in the CDS market, to the point where the credit spread of a company to me today, versus that time I was a summer intern or a Goldman or the beginnings of the credit market, the credit, the determination of a credit spread today, especially in the CDS market, has almost everything to do with technicals.

Speaker 3:

Is there a giant buyer of protection and that buyer can't griffon, that's some guy who just needs to girl that needs to hedge man or woman needs to hedge their exposure to Apple. They don't have any knowledge or any untoward feelings towards a company, they're just almost like a utility within the bank, performing a valuable service that they are a bigger determining where IG credit spread should be than fundamentals by far, and there's all sorts of technicals. There's the macro CTA community that embraced the credit rate of indices, but the players that are driving credit spreads today could not be more different than 15, 20 years ago.

Speaker 2:

That point you mentioned about discounts. Most of our discounts like going back to the 2020 COVID period. I wonder if some of that is just driven by FOMO and mind share around tech and AI. I have to assume that when you're in an environment, a macro environment, where the market risk assets in general being driven by just a select number of securities, that maybe results in those discounts widening because there's less money trying to take advantage of it because play the momentum somewhere else.

Speaker 3:

Yeah, well, look, they did go there. So there's a fund called Big Z, bigz BlackRock Innovation and Growth Trust, and someone just tweeted about it a little while ago and they had bad timing. You know, like who knows the future. The IPO did, I think, march 26, 2021. That was not a great time to try to mimic Cappy Wood, but there was demand and these products are. There actually was demand. So maybe this one was an exception to the Capito rule that these products are sold, not bought, and so they issued $5 billion of Big Z. The IPO had $5 billion.

Speaker 3:

You can go look right now I don't have it up in front of me, but it's somewhere like a $1.7 billion market cap, even though it's NAVs and I trust that BlackRock is calculating the NAVs on the privates properly. That one does have a lot of privates is $2 billion, so there's a $300 million gap. But so when ESG was hot, blackrock issued an ESG trust, and so you do see the fad of the day and you started this question with AI. So it made me think of Big Z. But the thing is, it's like we're going to win, we're going to lose, we're going to have bad timing. We're going to have good timing in this business. If you drop, it's trading now at a mid-teens discount. It was above a 20% discount before we started buying it but if you're going to lose more than 50% of your investor's money and then on top of it, you have this discount, it is just when I read how they defend themselves. They actually say well, we beat our benchmark. Like where's the? I'm sorry guys, like we actually screwed this one up If they literally turned $5 billion into a billion seven in two years and three months. Yes, they were going to lose money, being an innovation growth, but on top of it, this yawning discount, which would be bigger if we lose, is my belief because it was bigger before we got involved.

Speaker 3:

And when, often, when we lose the first round or whatever the number of rounds are in that fight, people say, oh, I thought this was going to win, or I thought BlackRock was going to be sensible, given they already have $9 trillion that they were actually going to show the entire investment world that actually they're performing good governance. So I'll get to some good governance examples. Hopefully. And actually, our employees own this thing. So we're going to be showing employees that we care about them and, by the way, the board is supposed to care about them actually as their main job, and we could press a button and turn this into something that would not be at a discount. Actually would require a slightly different plan because of the privates.

Speaker 3:

But on, you know, I could have been talking about eCAT, the ESG fund. Blackrock has a 10 different ESG mutual funds. One of those is going to be if not all are going to be super suitable to merge with eCAT and every single investor will benefit. It will go to NAV. You can get out of it if you want to it now. You can stay in knowing it's always going to be available to enter or exit it now and every single investor is going to make that discount back. You know who. I know that Because it's never not been that way. You know else. I know that because BlackRock said it.

Speaker 3:

You could look up a couple of closed-in funds that we were activist on. They tried a different trick to not be able to elect a board. Spary that story, although it's a good one. And in 2020, they came back and said actually nothing. They didn't mention Saba's name. They said here are four reasons why we are taking these two New York community funds and merging them with BlackRock, new York community open-ended funds.

Speaker 3:

We're doing it for four reasons. Number one, the discount will go away. This is BlackRock speaking, not Saba. Number two, the liquidity will be better because it will be part of a bigger thing, a bigger fund, and there'll be more liquidity. Number three, the expense ratio will go down because it will be bigger. And number four, there's no tax implication. So they did that and they wrote why they did it. And no matter how many times I tweet at BlackRock, at Larry Fink, to say what are you guys doing? You have $90 trillion. These funds are owned by your employees. You can press a button, you can show leadership and, on top of it, you have told everyone what ESG is supposed to mean. You've not only told everyone, you've written it.

Speaker 3:

You have written it down and you are violating your 10 commandments in like four different ways, maybe 11 ways. So how are you going to, how is someone, when this finally when me shouting into the cave finally reaches management there, how are you not going to? For what? For some, a few hundred million dollars of AUM coming out of that fund to the gain of all your shareholders? How are you not going to do that? So, anyway, so that. So now I digress because you asked about like products being issued. But yes, there are. The products that have been issued lately last couple of years were mainly equity funds. At the same time, it is hard, with the discount as big as it is now, for them to actually rationally think that they should bring a new deal when so many existing deals are at double digit discounts. So the IPO market for closed-in funds has slowed down a lot versus two years ago.

Speaker 2:

For the record, I love being in a cave hearing somebody yelling at BlackRock, so I'm glad to see that. Anyway, let's go to some of the audience.

Speaker 3:

So our record is it's high. It's high because I'm not, we're not predicting the weather. We're not predicting, you know, who can win at a game. It's the knowledge that there are a lot of disgruntled shareholders. They cannot organize, we are not doing it for them, but I happen to love that they get to come along for the ride and so if you buy more shares, you have more votes. I mean you ought to. I mentioned that some managers, like BlackRock we actually just had to sue five managers to get a judge to tell them what they just told.

Speaker 3:

Nuvine, which is the 40 act, very clearly says and I'm sure Chair Gensler, who's written about mutual fund fee abuses and things like that haven't had the pleasure of talking with him yet, though I had spoken to his predecessor Clayton that like you got to think about the little guy like it's your entire business. So so first you had asked about sorry so the first part of your question. You asked about leverage. Right, so, right. So leverage is I'm glad you brought it up, because these, the leverage, to many investors could be considered an attribute, and I mentioned on MLPs how it's also a danger, and what is not very nice is that the fees are higher when there's leverage than when there's not. Now I'd think about it from my perspective. I'm a hedge fund manager. I get X in 20, let's call X. I'll give it to you what X is. It's 1.75% for my fund. Okay, it's 1.75%. If I love things or I don't love things. If I bring cash levels up or take cash levels down, it's the same. In a closed end fund, they are charging fees on what's called managed assets. So it's literally like hey guys, investors kind of want leverage because that's what they signed up for. So let's assume they wanted it all times, because if we give them max leverage at all times, we get max fees. There's no incentive fees in these US funds, so that's the way we get fees. And so you end up in these moral hazard problems where the manager is running at full leverage into a brick wall.

Speaker 3:

Let me give you an example where you say okay. Let's say you say back well, who knew the brick wall was there? Did you know it? I didn't know it. I get things. I don't see those things coming either. So let me give you an even worse example. Let's take BlackRock, our friend, and California MuniSunds Okay. So now we have this world where let's talk about leverage in a world with Zerp and leverage where the Fed funds are at is five, five and a quarter ticking higher. You know, tim Rowe says they're going to go for it again in then, just two weeks.

Speaker 3:

So when the when black rock employees leverage to buy California munis, it is paying that fed funds rate. It's paying a spread on top. It's in the sixes. That's my belief, pretty sure it is. It's in the sixes. They're spending your money to borrow. They're paying in the sixes. What are they getting? What about when you start to realize, well, because of this inverted curve they're actually getting something in the fours. So borrow in the sixes to receive in the fours.

Speaker 3:

I can come up with a theory. It wouldn't be their theory. I could say it's all because they're so sure that Rates are gonna come down and price is gonna go up and so they're willing to run negative carry, even though these funds are income funds. They're willing to give you less carry and on top of it you get less because they get more fees. I already said the manage asset part. If they're levered then they're gonna get more fees. But to lever a California muni you have to borrow short term in the sixes and invest in the fours.

Speaker 3:

And so this is where the moral hazard part. It's just, you can't even believe it's like please. You know we run four and a half billion at Saba capital, please, at four and a half. This is how we try to treat investors fairly ethically. Put them first at a trillion, when is it enough? Well, how many trillion do you need to put investors first? And so so, what do you know? What are you afraid of like? What are you afraid of when you merge your, eat your? So ecad is not levered. It would be trivial to merge it. There wouldn't be any leverage change. But so the leverage, to your point.

Speaker 3:

The leverage is often considered an attribute, but it can be used to excess and it also the manager uses it at full time, at full leverage, almost always all the time. So when I look at a closed-end fund some of them don't have leverage, by the way I look at a unlevered closed-end fund and say that one at minus 14 is much better than a levered one, because it's almost like when you, if anyone knows how to count cards it's like dividing the raw count by the number of decks to get the true count. Like if I have 50% leverage and it's my a minus 15. It's almost like you know, I have 50% more stuff, so 10 million is 15 million of stuff. I'm gonna say that a minus 15 is really a minus 10 because I have to divide that, that by the leverage. So so we do look for low levered funds, but there's nothing per se, in general, wrong with the leverage. But when we think about BRW, so act as you know, do as I do, you know not, whatever that expression is so. So I'm trying to show, through leadership of an actual closed-end fund, that we're not, can always be, at max leverage, and so BRW has often been risk averse Safe, which really gave us a great result on the nav in 2022, and and so we don't run it always at full, at full leverage.

Speaker 3:

Yeah, you asked about our fight record. Ultimately we have. We have won almost all of the campaigns. Couple of them we were losing. But here's another interesting fact we're in a consolidating industry. When a manager buys another manager, now the burden goes to them for the deal to close. They don't need to get LP consent at 50.01 percent, which might be hard, you know, versus us to overthrow management if they're doing the wrong thing meeting 50.01.

Speaker 3:

They need 66 and two-thirds, though, though, for Morgan Stanley to consummate the deal with eaten vans and I'm a huge fan of the leadership at Morgan Stanley and I know, I know them quite well they need. They needed even advanced, needed 66 and two-thirds, but the shareholders were so Upset about performance that, in a board election I might be getting the strong we actually won 81% of the votes, and On that board was not some random team of eating advanced people and included the actual CEO of the company. So imagine, like you know, david Solomon or Lloyd Blank fine, that they had the time to sit on a closed-end fund board with all the hundred billion other things they have to do, and, if they did, to lose 81 to 19. So, though, in consolidation, we were able to win because the odds shifted, because they needed two-thirds, otherwise they wouldn't, they'd have to go into liquidation because they would not be the rightful manager of that fund. So consolidation has been very good for the industry, and I also want to just say like, like they say about reading, you know, the first few pages of the New York Post or the you know ten o'clock news, like I'm here talking to you about things going wrong, but I have to say, there are a number of managers who, without us ever even talking to them and maybe it was not even related to them, seeing us come up the holders list, as you know, five percent holder, ten percent holder, managers that have done smart things. You know Managers that have done things that I don't have an opinion, where they're smart or not smart, but their funds are not at discount. So you could look at PIMCO and find there's only really one funded a discount in the MLP space, and MLPs, I think, are fascinating.

Speaker 3:

Goldman Sachs, by the way, ger, which I tweeted about a couple of times, recently Decided hey, this thing has been a minus 20 for three years. We've tried our best, we tried various things. We enough is enough Simply announcing that we're going to liquidate the funds, which is trivial. Selling a couple million dollars of Individual stocks over some reasonable period of time will give investors a 25% gain. 80 would go to 100. And guess what? It was announced June, I think, 6 June, 7, june, 8. Maybe it's liquidated already. Okay, they announced it.

Speaker 3:

And I tip my hat to Goldman Sachs because they had, you know, millions of dollars of fees in perpetuity if they wanted to pull the BlackRock Maneuver or the Franklin maneuver and they, without us even speaking to them. I never once spoke to them, they just said this is the right thing for Sheryls. They didn't need me to speak to them because they're a an institution that you know. You know, critique them for things, big or small, whatever, not getting into it, but they are a set of, in my view, some of the most impressive people on Wall Street and actually Austin Act as leaders. And then an example where we didn't, where we were really impressed with what the manager did. This will tell you how much inefficiency there is in the market. And why am I talking about this so much? Because there's no Ken Griffin in this market. It is a that of Retail investors that don't know what they own, that want to get out, that there's not enough guys like us Although there are a lot more coming buying at these discounts. I can tell you that the cavalry is coming. We see smart investors showing up on holders list.

Speaker 3:

But but another example was there was a closed-end fund with with equities in it, one sector that was at a 14 discount, and the same Manager, which is Guggenheim, had closed-end funds with the same sector in it. I think it was the utility sector or the energy sector, these utilities at an 11% premium. And so you have not closed-end versus open-end, you have closed-end versus closed-end. Same manager, same industry. One's it plus 11, ones at minus 14. So what did we do? We started buying the minus 14. At the time minus 14 was appealing. Now we get out of bed at minus 15 or 16 and we buy with both hands. You know, at higher levels. And they came up with the idea of Merging the discount fund into the premium fund. So we're gonna make it a bigger funds, lower expense ratio, same same basic portfolio. And the minus 14 merged with the plus 11.

Speaker 3:

Thaba may or may not have hedged itself by shorting. One could have hedged itself. Let me say that way by shorting the premium fund you can't get a good borrow like a borrow and dig size on premium funds. But on funds you want to short. But your long collapsed against your short because they became the same thing and 25% was made. The ultimate, the ultimate resting spot for a minus 14 merging with a plus 11 a few weeks after, I think, was something like plus 9. So thought, like the, it was the GPM. Someone's writing to me GPM went into GOS and you know it was brilliant. It was brilliant and I tip my hat to Guggenheim.

Speaker 3:

So I wanted, just I wanted to spend this minute or two to say this is a space where you know you're seeing me fight, but it's not because I want to fight, it's because I've seen good governance and I've seen bad governance and I've seen terrible governance by the governance, the supposed governance king, the one that has raised dozens of billions of sorry, a hundred billion dollars in the dock of. We know what ESP is, but we're gonna say here's what ESG is. You shouldn't have more than you shouldn't be on more than four public company boards. That's what black rock has told the world us companies, european companies, you should not be on more than four. But black rock board close-in fund boards sit on 70 black rock boards at the same time and it's just not reasonable.

Speaker 3:

So the reasons that black rock said that you could probably probably properly administer 70 boards on top of all the other responsibilities and other boards that one might sit on and and your daily lives, and what do you do? By the way, sorry for now going into this new world, but let me say one thing what do you do if two of those funds. If three of those funds are terrible performers, well, are you supposed to think locally to that fund? Or you supposed, or can you not help, but think globally? Well, if you're the, if you're the board member of a single fund that did terribly, you may decide to do the right or wrong thing, but your thoughts are pure because you're only on that one fund.

Speaker 3:

If you sit on 69 other boards and you receive paychecks from the same address, you're thinking also. You cannot help. But not is human nature. What are they gonna think of me when they have to renew my contract with them and there's so many people that would love to step into my shoes? What are they gonna think about me on the other 69? And so you were basically on the dole there, your drug dealer and you are getting paid $7,000 checks for 70 boards. You're getting half a million dollars a year.

Speaker 3:

Don't rock the boat on that one, because you have to think about the 69. I haven't. I'm not saying anyone's doing that. I could not possibly know, but I'm thinking about behavioral, you know Reasonableness and I just I agree with black rock. You shouldn't be on more than four.

Speaker 3:

By the way, they're talking about four boards across four different companies, I mean 70, so it's not five, it's 70. So so I look at that and I have this. You know, on the one hand we have our Goldman and Guggenheim examples. The other hand, we have our goal, our Franklin and Brock arc examples, and and I find this space so fascinating because we're talking about earning equity plus type returns for taking the risk that the System of voting actually will not be undone, that actually I can vote my shares actually, if I can get to 20% state, and I see other investors that are not asleep at the wheel, I just assume we're going to win. And so the longest-winded answer and history, twitter spaces to say yes, we've won almost all the time, but sometimes it takes two or three years and it's painful and we don't always win, but we've won and In the case of BRW, I don't want to overstay my welcome. It's a third example of the managers do something, doing something just Incredible and incredibly bad, and that led to the ultimate handover of the fun dots.

Speaker 2:

And that's a perfect place to wrap this Twitter space up. Everybody, please make sure you follow Boaz Weinstein here on Twitter. If you're interested in learning more about stop-offs, you check out their website and hopefully I will see you all later.

Speaker 3:

Thank you, boaz, really do a pretty good. My pleasure. Thank you everyone you.

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Michael A. Gayed, CFA

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