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Under the recent FT Alpha Bill Story on Saba Capital, reader Yokel 2.0, a US activist hedge fund that failed to take control of a bunch of UK mutual funds, asked:
I agree! It’ll be interesting! However, the calculations involved are difficult.
On the one hand, the UK trusts have mostly risen in the shares purchased by SABA. Meanwhile, they are standing up because the mackerel had bought it, but now they are stuck. Six of the seven coup attempts have failed miserably, with one outcome pending. There is no easy way for Saba to cash out of these positions without losing its stocks again.
Without a certain kind of compromise between Trust Board and Saba founder Boazweinstein, his best option is to continue to be upset by change. Independent shareholders of the trust may win or wear out, or ultimately forget to vote. It may take a while.
How long is it lasting? Again, it’s difficult to say. I don’t know how much the leverage SABA employs in its UK portfolio, or the derivatives and short positions used to hedge bets.
All we can do is create some envelope calculations.
Saba’s minority stake in UK mutual funds is worth around $3.8 billion. The three times leverage is not noticeable for hedge funds, suggesting $1.2 billion in equity and $2.6 billion in debt.
At 5% interest, debt services alone cost around $127 million a year. For hedge costs, we’re picking numbers in the air, but let’s say the mackerel is paying 50 bps to cover half of that exposure.
Don’t like those numbers? Choose yourself using BoazCulator™:
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The above is a toy model. Those who we spoke of suggesting that the default settings are probably in the right kind of ballpark, they may be very wrong, and so too.
In any case, it’s difficult to find an equation that will make SABA’s strategy cheap enough to implement in the long term. If you plan to run out of Trust Independent shareholders, it becomes a very expensive movement.
On Friday, shareholders of Edinburgh Worldwide Investment Trust will vote for Saba’s hostile takeover proposal. Six previous fragments of Saba suggest a victory possibility, but Weinstein has already moved. His latest pitch is converting several closed-end mutual funds into open-end trusts.
But speed is the essence. With Saba’s latest Salvo launch, Weinstein said the UK campaign fund has seen a record influx. Given the potential for a strategy cash burn and the vulnerability of profits from market to market, these clients cannot guarantee they will hang out for a long time.
Read more:
– UK mutual funds deserve better enemies than Boaz Weinstein (FTAV).
– UK mutual funds are bad. What makes Boaz better? (ftav)
– Weinstein’s Very Small British Adventures (FTAV)
