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Below a recent FT Alphaville story on Saba Capital, the US activist hedge fund that’s been failing to seize control of a bunch of UK investment trusts, reader Yokel 2.0 asked:
Agreed! It would be interesting! The calculations involved are tricky, though.
On one hand, the UK trust shares Saba has bought have mostly gone up. On the other hand, they’ve gone up because Saba was buying, but now it’s stuck. Six of its seven coup attempts have failed miserably, with one result pending. There’s no easy way for Saba to cash out of those positions without making the shares go down again.
Absent some kind of compromise between trust boards and Saba founder Boaz Weinstein, his best option is to keep agitating for change. Maybe a trust’s independent shareholders can be won over, or worn down, or will eventually forget to vote. It could take a while.
How much would persistence cost? Again, it’s difficult to say. We don’t know how much leverage Saba is employing on its UK portfolio, or the cost of the derivatives and short positions used to hedge its bets.
All we can do is make some back-of-the-envelope calculations.
Saba’s minority stakes in UK investment trusts have a total value of $3.8bn, approximately. Leverage of 3x would be unremarkable for a hedge fund, suggesting $1.2bn of equity and $2.6bn of debt.
At 5 per cent interest, debt servicing alone would be costing Saba about $127mn a year. For hedging costs we’re picking numbers out of the air, but let’s say Saba is paying 50 bps to cover half its exposure, which adds $10mn-ish to the cost.
Don’t like those numbers? Pick your own using our Boazculator™:
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The above is a toy model. People we’ve spoken to have suggested the default settings are probably in the right sort of ballpark, but they might be wildly wrong and so might we.
Whichever way, it’s hard to find any formula that makes Saba’s strategy cheap enough to run over the long term. If the plan is to wear down trust independent shareholders, it’ll be a very costly exercise.
On Friday, Edinburgh Worldwide Investment Trust shareholders will vote on Saba’s hostile takeover proposal. Saba’s six previous trouncings suggest its chances of a victory there are slim, but Weinstein has already moved on. His latest pitch is to convert some closed-ended investment trusts into open-ended ones, which might betray a lack of understanding about how high Woodford still lives in the mind of the average UK investor.
But speed is of the essence. On launching Saba’s latest salvo, Weinstein said the UK campaign fund had seen record inflows. Given the strategy’s likely cash burn and the fragility of its mark-to-market gains, those clients can’t be guaranteed to hang around for long.
Further reading:
— UK investment trusts deserve a better enemy than Boaz Weinstein (FTAV)
— UK investment trusts are bad. What makes Boaz better? (FTAV)
— Weinstein’s awfully small UK adventure (FTAV)
