What happens when a massive hedge fund takes on the world’s largest money manager? They go to war. Hedge fund Saba Capital Management is trying to buy up shares of BlackRock’s closed-end funds trading at discounts to net asset value (for less than the value of the underlying shares) and then install new board members who will make changes to the funds to realize their value. If the strategy works, it could give Saba plenty of profit. So far, the attack on the funds by Saba has failed, and now the hedge fund is suing BlackRock. The Wall Street Journal’s Jack Pitcher reports:
“The truth is this is a hedge-fund manager who is using its sheer size and assets to take control of closed-end funds for its own benefit at the expense of the retail investor,” said Stephen Minar, managing director of closed-end fund products at BlackRock.
The hedge fund has so far failed to elect new directors at the BlackRock funds. Two of the funds didn’t reach the quorum required to elect new directors at their annual meetings.
In his lawsuit, Weinstein claims the world’s largest asset manager is entrenching existing trustees and depriving its closed-end fund shareholders of their voting rights.
The suit, filed in New York federal court, targets 16 closed-end funds run by BlackRock, Franklin Resources, Tortoise Capital Advisors, Adams Funds and FS Investments. It seeks to invalidate what’s called a control-share provision, a law in some states that allows companies to cap the voting power of a single new shareholder or associated shareholders.
The BlackRock funds in question are the ESG Capital Allocation Term Trust, the Innovation and Growth Term Trust, and the California Municipal Income Trust. All three currently trade at discounts of more than 10% to their asset value.
“This isn’t an attack on all closed-end funds—these are funds that are at the bottom of the barrel in terms of discount,” said Weinstein, who is Saba’s founder and chief investment officer. “These are the ones that are failing to offer their investors a chance to get close to net asset value.”
If courts rule in Saba’s favor and strike down control-share provisions, asset managers would lose one of their primary defenses against proxy attacks.
“If those cases come out the wrong way, I think there’s real concern about the closed-end fund as a viable vehicle going forward,” said Kenneth Fang, associate general counsel at the Investment Company Institute, an association of regulated funds such as mutual funds and ETFs.
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