Guest Article: Comparison Of Two Saba Capital Closed-End Funds- BRW And SABA

By George Spritzer, CFA

Summary

• Saba Capital Management is an investment advisory firm focused on credit and equity relative value strategies.

• They use four main strategies: credit relative value, tail hedge, active closed-end fund strategies, and SPAC strategies.

• Saba Capital manages two closed-end funds, BRW and SABA, which offer hedge fund-like exposure without incentive fees.

Saba Capital Management is an investment advisory firm focused on credit and equity relative value strategies.

Boaz Weinstein started Saba Capital in 2009 as a "lift out" from Deutsche Bank's proprietary credit trading group. Boaz had originally formed the group at Deutsche Bank in 1998.

Pierre Weinstein, who is a Partner/portfolio manager at Saba at the launch and is primarily responsible for equity derivatives. He is not related to Boaz, even though they share the same last name.

Paul Kazarian joined the team in March 2013, and is responsible for exchange traded products, including ETF arbitrage and closed-end funds. Before coming to Saba, Paul was a Director at RBC Capital Management in the Global Arbitrage and Trading Group.

The four main strategies currently used by Saba Capital are:

1) Credit Relative Value: This is the original "flagship" strategy used by Saba Capital when it was first formed. They try to identify market dislocations across the whole capital structure using a long/short market neutral approach in both credit and equity markets. They combine quantitative models with in depth fundamental research and technical analysis.

2) Tail Hedge: This is a risk reduction strategy designed to provide a cost effective portfolio hedge during market periods when there is significant stress and dislocation. The primary vehicle used is credit default swaps or "CDS" on a portfolio of lower spread investment grade companies.

At times, Saba may also look for opportunities to buy CDS on indices and higher yielding companies, or to invest in equity puts. By using proprietary tools, their goal is to generate alpha compared to simple tail hedges that merely rely on passive indices.

3) Active Closed-End Fund Strategies

Saba takes an active role in managing their closed-end fund trades. Their main focus is on CEFs that trade at a significant discount to NAV. They look at CEFs around the world, not only in the US. The primary focus is on fixed income oriented CEFs that own high yield bonds and loans. One immediate edge they get here is that the distribution yield of the CEF is generally higher than the yield on the underlying fixed income instruments.

But Saba Capital is also a strong activist investor. They use various corporate actions as a tool to monetize the discount to NAV. For many CEFs, Saba Capital is the largest shareholder.

4) SPAC Strategies

Saba Capital has over 15 years experience in trading SPACs using a relative value approach. they try to generate high risk-adjusted returns, but with low risk. They primarily own SPACs before the business combination is consummated, since these issues have the protection of the underlying assets in the trust. But they also may use SPAC warrants and listed options to enhance returns.

======

Saba Capital runs an ETF with ticker (CEFS), that focuses mainly on their active closed-end fund strategies. CEFS is not the main focus of this article, which focuses on (BRW) and (SABA) which are closed-end funds that are more like hedge funds, and tend to use all of Saba's active strategies.

At one point in 2022, BRW had over 80% of the portfolio invested in the low risk SPAC arbitrage strategy. Check out my BRW article from June, 2022.

https://seekingalpha.com/article/4516532-brw-a-low-risk-investment-using-spac-arbitrage

Saba Capital very opportunistic when managing their portfolios. At the current time, the BRW exposure to the SPAC arbitrage strategy is only 2%. They apparently feel there are better opportunities now in other asset classes.