Large closed-end fund discounts are usually a sign of heavy selling from individual investors that are looking to get out fast. Closing the gap between the price of the shares and the value of the assets is part of what hedge fund managers are looking to profit from.
“There’s a lot of opportunities,” said Phillip Goldstein, co-founder of Bulldog Investors, which pursues activist strategies in closed-end funds. “Assuming that the discounts persist, I would expect activism to increase.”
Activists often battle funds publicly. In March, Saba’s Weinstein posted on X, the platform formerly known as Twitter, a recommendation that investors buy Canada’s Citadel Income Fund. The fund, unrelated to Ken Griffin’s Citadel, was trading at about a 30% discount to its asset value, which Weinstein ascribed to “awful performance.” Its price fell around 32% last year, and even accounting for dividends, it had lost about 1.6% annually since its launch in 2005.
Saba negotiated with the fund, and in September, posted that the fund was offering a cash redemption for 70% of its units. This week, Citadel Income Fund said its unitholders approved a resolution to redeem another 7.19 million shares. Its discount has shrunk to about 8%, Bloomberg data show. A representative for the Citadel Income Fund didn’t respond to email seeking comment.
Weinstein’s firm runs a $130 million closed-end funds ETF (CEFS) that buys up vehicles trading at discounts to their net-asset values and hedges exposure to rising rates. It has gained about 9% this year through Thursday’s close, including dividend payments.
The potential gains have drawn the eye of some investors. The market value of positions held by AQR Arbitrage, the arbitrage affiliate of AQR Capital Management, jumped to over $190 million by the end of June from about $44 million a year earlier.
The firm has become much more active in the space because current discounts are compelling both compared to their historic levels and in absolute terms, according to Michael Schwert, managing director at AQR Arbitrage. The money manager is pursing “mean-reversion trades” which bet the dislocations will revert over the mid-to-long term, he said.
D.E. Shaw & Co. built positions in at least four closed-end funds in the second quarter, including in BlackRock Innovation and Growth Term Trust (BIGZ), BlackRock ESG Capital Allocation Term Trust (ECAT), BlackRock Capital Allocation Term Trust (BCAT) and Neuberger Berman Next Generation Connectivity Fund (NBXG), according to data compiled by Bloomberg.
D.E. Shaw declined to comment.
Meanwhile, the $34 billion Naperville, Illinois-based money manager Calamos Investments in September filed paperwork with the Securities and Exchange Commission for an actively managed closed-end-fund ETF that would also invest in CEFs “trading at attractive discounts.”