(Bloomberg) -- It’s a hedge-fund summer idyll: Chickens strut, tomatoes grow ripe and the Atlantic breeze floats over this Hamptons refuge like a sweet balm. Here, in socially distanced splendor, Boaz Weinstein is printing money.
As the pandemic consumes the outside world, Weinstein has repaired to his gated estate in Sagaponack, replete with tennis court, pool and a Vegas-style card room. When New York shut down, he left his office in the Chrysler Building and decamped to Long Island, like others from high-caste Manhattan. Unlike much of that crowd, however, Weinstein has settled here to make money -- lots of it.
He’s added to his profits every month this year, trading credit and derivatives of companies including Wirecard AG, retailers Staples Inc. and Macy’s Inc. and loading up on cheap closed-end mutual funds. That’s helped him outperform all of his hedge fund peers, generating an eye-popping 90% gain in his main fund after years of uneven returns. He’s attracting new money, pulling in $1 billion to his now $3 billion Saba Capital Management. And he sees room to profit, even as stocks and bonds rebound.“Markets are at an unstable place right now. I look out at the next five months, and there are lots of known unknowns,” he said in a phone interview, pointing to everything from the course of the pandemic to the U.S. election and relations with China. “There are dislocations today that are as large as they were three months ago.” He predicts there will be more moves to make as default rates mount.The big payday came right on time for the 47-year-old. Before this banner year, an investor who signed up on day one in 2009 would have made an annualized return of about 3% -- less than the typically paltry returns on a municipal bond fund. For a firm whose investment thesis is to capitalize on volatile times, the decade following the financial crisis offered scant opportunities as the Federal Reserve kept interest rates near zero. Saba assets dwindled from a peak of $5.6 billion in 2012. Now, with the pandemic setting off the most violent market moves in more than a decade, he’s thriving.
The broad outlines of Weinstein’s meteoric rise and subsequent stumbles are well known on Wall Street. His dad had an insurance brokerage in Brooklyn, and his mom worked as a translator, sending him to public schools. By 16 he was a chess master, and at just 27 a managing director at Deutsche Bank AG. He spent a decade making outsized profits for the German lender until 2008, when he lost $1.8 billion just months before the planned spinout of his Saba trading unit. He’s long noted that those positions later rebounded.Always a confident and brash trader, he’s famous for pushing his advantages. A Deutsche Bank colleague goaded Weinstein into playing a chess game with a handicap: sitting with his back to his board. Weinstein took the match in under two hours.
Another favorite tale among colleagues is the time he won a Maserati at a celebrity poker tournament. What’s less known is that he went back to retrieve the prized Italian automobile the next year after finally getting a driver’s license.
He remained self-assured even after losing money at Saba in five of the last 11 years. He notes that most long volatility funds didn’t survive the past decade.
Some market participants and academics are predicting Weinstein’s good times will be short-lived. The Fed’s massive stimulus -- combining asset purchases and a pledge to keep interest rates near zero for the foreseeable future -- could leave him hanging.
The VIX, the so-called fear gauge of the S&P 500 index, already has dropped to less than 25 from more than 80 in March. In the first half of July, Weinstein’s fund gained only 3 basis points, according to an investor. Yet Weinstein said he’s not afraid.
“So many companies defaulted, or are about to default, despite all the things the government has done,” said Weinstein, calling it incongruous that the remaining high-yield pool is priced as if further defaults are contained.
Many of Weinstein’s trades revolve around credit-default swaps, a sort of insurance policy that pays out if a borrower defaults, and which he’s been trading since his Deutsche Bank days.As the Fed’s actions have inflated prices on some junk bonds, he’s turned to selling the CDS of investment-grade companies like AT&T Inc. and Verizon Communications Inc., and buying those of high-yield names including Devon Energy Corp. and Targa Resources Corp.
He’s been profiting on companies whose stocks and bonds tell contradictory stories. Wirecard, the German payments processor at the center of an accounting scandal, is one. Weinstein sold CDS expiring in December, and used the premium to buy puts on the stock, which were cheap because the company has been a darling for German retail investors. “Even if the bonds went to zero you still make money. It’s a solid gain for us,” he said.In what’s known as a basis trade, Weinstein has looked for companies where the bonds have been excessively beaten down, but where the CDS is relatively inexpensive. The idea is to take both long and short positions to profit no matter what. He’s been doing such trades with Staples, Rite Aid Corp. and Macy’s.
With classic Weinstein confidence, he says his summer of profits has only begun.“June has been one of our best months of the year, even though markets have been buoyant,” said Weinstein. “It’s a messy market, and it serves our strategy well.”
Saba is also buying high-yield closed-end funds that trade at a 14% to 16% discount to the value of their holdings, a gap he expects to close soon. In all, the firm owns $1.4 billion of closed-end funds across multiple portfolios.“He has been good with coming up with clever trades that are long volatility explicitly or implicitly,” said Ermenio Schettino, a partner at Falcon Money Management, an early investor. While Schettino has cut his position with Saba over the years as opportunities dried up, he’s now so optimistic that Weinstein’s winning streak will continue that he’s added to his investment. Steve Cohen’s hedge fund and Bill Ackman also have entrusted money to him this year.Weinstein has been laying low as his wife, Tali, has been spending more time in New York City, preparing a run for the powerful Manhattan district attorney’s office. His in-laws have been living with him since he moved to his Long Island base. They have been raising vegetables and chickens on the two-acre estate next to billionaire hedge fund manager David Tepper’s summer pad.
A tennis court on the property is an ode to his competitive playing days at the nerdy Stuyvesant High. The poker room in his man-cave has seen busier days, but he has switched to occasionally playing over Zoom with hedge fund pals including Marc Lasry.
“Poker is very analogous to life,” said Phil Hellmuth, a professional poker hall-of-famer who has been invited to some of those online gaming sessions. “In poker you develop a style that works. Boaz has been really smart in being able to find the right style.”
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