Hedge fund manager Boaz Weinstein, the founder and chief investment officer of New York-based Saba Capital Management, has won a lawsuit against asset manager BlackRock (BLK) over the control of a group of closed-end funds, a special type of mutual funds that’s at the core of Weinstein’s investment strategy.
Saba Capital sued BlackRock in June in a New York federal court after BlackRock trustees said at their 2023 annual meeting they would strip shareholders’ votes. A judge ruled yesterday (Dec. 6) the practice violated the Investment Company Act of 1940 (ICA), which regulates investment companies and the investment products they offer.
Weinstein’s firm employs an investment strategy known as closed-end fund arbitrage, where an investor buys shares in funds that trade for less than the underlying value of their assets, or net asset value (NAV), and simultaneously sells them at NAV for a profit.
Unlike the more common open-ended funds, such as most exchange-traded funds (ETFs) and mutual funds, a closed-end fund issues a fixed number of shares through a single IPO and new shares are not created or redeemed based on market demand, which could lead to shares being traded at a premium or discount relative to their NAV. In order to be able to cash out their shares in a closed-end fund at NAV, investors like Weinstein often push for changing these funds into an open structure by soliciting shareholder votes.
Weinstein is a vocal critic of BlackRock for blocking him from effecting fund structure changes, accusing the asset manager of governance failure. BlackRock has countered that Saba’s real interest is not in governance, but short-term profits. Weinstein has targeted closed-end funds advised by other managers, too.
“By hook or by crook, BlackRock and its trustees were determined to avoid being held accountable for the billions of dollars lost for investors,” Weinstein said in a statement to Observer today (Dec. 7). “We are pleased to have brought this lawsuit for the benefit of all investors in closed-end funds managed by BlackRock to put an end to the practice of robbing shareholders of their right to vote all of their shares.”
The court yesterday ruled that 11 closed-end funds adopted control share provisions in violation of the ICA. The list includes two funds managed by BlackRock: the BlackRock Municipal Income Fund (MUI) and the BlackRock ESG Capital Allocation Term Trust (ECAT). Saba Capital owns shares in ECAT.
About 46 percent of Saba Capital’s flagship fund is invested in closed-end funds, Weinstein said at the Bloomberg Invest conference in New York in June.