Boaz Loses for Second Year as European Bet Sours

Boaz Weinstein’s Saba Capital Management LP is headed for its second losing year in a row, hurt in part by a wager that European equities would rise more than high-yield credit, according to four people with knowledge of the hedge-fund firm.

Saba’s main fund lost 1.2 percent in the first six days of December, bringing losses this year to 3.5 percent through Dec. 6, said the people, who asked not to be identified because the fund is private. Weinstein’s bet has backfired this month as European stocks fell and the price of non-investment grade corporate bonds jumped.

Weinstein, the former co-head of global credit trading at Deutsche Bank AG, attracted attention last year after betting against JPMorgan Chase & Co. trader Bruno Iksil, known as the London Whale. Saba still ended 2012 down 3.9 percent in its main fund. The subpar performance has prompted clients to pull money from the New York-based firm, with assets dropping to $3.9 billion as of Nov. 30, from $5.5 billion in May 2012.

“Weinstein started his fund when the strategy was hot and he had strong performance out of the box,” said Brad Balter, who runs Balter Capital Management in Boston, which farms out money to hedge funds. “Now, after two years of losses, it’s not unreasonable for investors to re-evalutate.”

Even with the setback, Weinstein is not backing away from his bet, said the people, as analysts predict that demand for junk bonds will recede. Weinstein has a similar wager in place in the U.S. and Japan, one of the people said.

“Since high yield spreads have rallied this year, we do not expect the same search for yield that we have seen,” Saul Doctor, a JPMorgan Chase strategist in London, said in a Dec. 5 note to clients.

Jonathan Gasthalter, a spokesman for Saba at Sard Verbinnen & Co., declined to comment on the trade.

Strong Start

Weinstein, 40, started Saba in 2009 to trade on price discrepancies between loans, bonds and derivatives. He posted strong performance in the first two-and-a-half years, particularly in 2011, when he beat Bloomberg’s capital arbitrage credit hedge-fund index by about 8 percentage points with a return of 9.3 percent. Hedge funds industrywide fell about 5 percent in 2011 as the European debt crisis roiled markets, according to data compiled by Bloomberg.

Weinstein last year bet against JPMorgan trader Iksil, after he amassed a big position in a vintage derivative index. Iksil owned 50 percent of outstanding wagers in the contracts he was trading and eventually cost the bank $6.2 billion.

Saba is wagering on a gain in European stocks by buying the Euro Stoxx 50 Future index. For the credit portion of the trade, Saba took a position in Markit Group Ltd.’s iTraxx Europe Crossover indexes covering about 2 billion euros ($2.7 billion), according to the people. The indexes are linked to the creditworthiness of 50 speculative-grade companies.

Saba’s Bets

Buying the iTraxx index provides the purchaser with protection against a default of one or more of the underlying companies, and it rises in value as their financial health declines.

In December, both legs of the bet went against Saba. The stock futures index, after tumbling 5.3 percent in the first half of December, is down 1.6 percent for the month as of Dec. 20.

The most easily traded of the credit indexes was trading at 285 basis points as of yesterday, down from 342 basis points at the end of October, according to prices compiled by Bloomberg. That’s the lowest level since November 2007. A basis point equals a hundredth of a percentage point.

The loss from the trade is less than $60 million and accounts for under 2 percent of the firm’s assets, according to one of the people familiar with the matter.

Small Percentage

Weinstein’s European wager is made using three indexes issued over the past 18 months with a gross notional value of $280.5 billion, according to the Depository Trust & Clearing Corp.

Average daily trading in the most current index, known as the 20th series, was $3.6 billion through Dec. 13, down from a one-month average of $5 billion and long-term average of $5.8 billion, according to DTCC data.

Gabriel Roberts, who led global credit-index trading at Citigroup Inc., joined Saba this year in New York to oversee trading of benchmark credit-default swaps indexes in North America and Europe. The two previously worked together at Deutsche Bank.

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