The hedge fund manager who famously took down the London Whale will try to test his hand in the exchange traded fund space through an actively managed strategy that tries to exploit inefficiencies in the closed-end fund space, similar to what the parent Saba Capital has done.
On Tuesday, Saba Capital rolled out its first ETF, the Saba Closed-End Funds ETF (BATS: CEFS). CEFS comes with a 2.42% total expense ratio, according to the prospectus.
CEFS will be managed by Saba’s Boaz Weinstein, Founder and Chief Investment Officer, and Pierre Weinstein, Partner and Portfolio Manager.
The new actively managed ETF will try to generate capital appreciation and high income by investing in closed-end funds that trade at a discount to their net asset value while hedging the ETF’s risk to rising interest rates.
Closed-end funds or CEFs are a publicly traded investment company that raised a certain amount of capital once through an initial public offering. The price of the CEF can fluctuate like any other stock listed on an exchange. However, unlike ETFs, a CEF issues a set number of shares, so the CEF can trade at a high premium or discount to its underlying net asset value.
“Many closed-end funds are trading at an attractive discount to their net asset value,” Weinstein said in a note. “In an environment where investors are searching for yield, we believe closed-end funds offer high income and a margin of safety due to the discount.”
Saba Capital investment process includes proprietary models that dynamically rank closed-end funds across a variety of factors, such as yield, discount to NAV and quality of underlying securities through a combination of fundamental analysis, quantitative analysis and proprietary screens.
The majority underlying holdings will be comprised of lower-rated securities and unrated securities of equivalent investment quality, which tend to generate the highest yield opportunities.
Underlying components may include equities, investment-grade securities and unrated securities, along with mortgage-related and other asset-backed securities; loan participation; inflation-protected securities; structured securities; variable; floating and inverse floating-rate investments; preferred stock; and derivative instruments. The underlying funds may also take short sales in securities or maintain a short position.
Furthermore, the fund may borrow for investment purposes and seek to hedge rate risk by engaging in short sales of U.S. Treasuries.
Current holdings include Adams Diversified Equity Fund, Alpine Total Dynamic Dividend, BlackRock Corporate High Yield, Delaware Enhanced Global Dividend and Dividend and Income Fund, among others.
For more information on new fund products, visit our new ETFs category.