The transcript from this week’s, MiB: Boaz Weinstein, Saba Capital, is below.
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RITHOLTZ: This week on the podcast, I have an extra special guest. Boaz Weinstein is the founder of Saba Capital, a $5 billion hedge fund that specializes in some really interesting types of trading, credit default swaps, tail protection, volatility trading. Saba is one of the five largest investors globally in SPACs, but not in the way you think. They’ve done really well with it despite all of the troubles that SPACs have seen.
Previously, he was co-head of Global Credit Trading at Deutsche Bank. And ultimately, he and Deutsche just spun out Saba, along with his whole team, as a standalone fund. Man, I don’t even know where to begin. This was just an absolutely fascinating conversation. Not only is he a quant with some real insight into capital market structures and valuation and mispricing, but he has put together an amazing track record on not just in terms of his trading, but his consistent ability to find parts of the markets that are completely mispriced because people fundamentally misunderstand what’s going on there. Really just a fascinating guy, an amazing conversation.
With no further ado, my conversation with Boaz Weinstein of Saba Capital.
WEINSTEIN: Hi, Barry. It’s great to be here.
RITHOLTZ: And am I pronouncing your first name correctly, Boaz?
WEINSTEIN: It depends where you’re from. In these parts, that would work. And it’s really a typical Israeli name, and it would be Boaz.
RITHOLTZ: Boaz. All right. So — so let’s start with your background, beginning with you started to play chess when you were 5 and eventually became pretty highly ranked. How did you get into chess, and how long did it take to become a ranked player here in the U.S.?
WEINSTEIN: Sure. So I had those parents that would drive us on weekends. My — I have a sister who actually has been — been on Bloomberg many times, Ilana. But we — my parents would take us to Saturday morning workshops to learn about model rocketry or chess, or what have you. But I didn’t actually play in tournaments till I was 13. I got to junior high school and I was interested in the game. And there was a kid a year above me and I saw that he was ranked in the Top 50 in the United States, and I thought, “That’s amazing. How do I — how do I get there?”
RITHOLTZ: And so how long did it take you from when you started playing in tournaments to becoming ranked?
WEINSTEIN: So I — I became really obsessed with it. And so in three years, I went from a beginner to number 2 in the country for age 15, 16.
RITHOLTZ: Wow. That’s pretty — pretty impressive. And that’s thousands and thousands of hours.
WEINSTEIN: Yeah, at least.
RITHOLTZ: And — and so from chess, you moved to poker and blackjack, which seems more of a fit with — with finance. What led you from poker and blackjack to credit and derivatives?
WEINSTEIN: I knew I wanted to be on Wall Street well before I knew how to play poker. In fact, I didn’t really learn poker until I was in my mid 20s. Blackjack I learned a bit earlier, maybe we’ll get there. But Wall Street was always something I was interested in. I — my parents would listen to — watch Wall Street Week with Louis Rukeyser. I can tell you the postcode for Owings Mills, Maryland. It’s 21117 because that’s — they would always do that right in the middle of the show.
And so I was able to parlay that interest into getting an after-school job when I was a high school student in New York City, at Merrill Lynch, and then summer internships at Goldman Sachs, which were really among the most fun times in my career on Wall Street.
RITHOLTZ: We’ll — we’ll talk a little bit about Goldman in a bit. You mentioned blackjack, I understand you got pretty good at blackjack, eventually getting kicked out of the Bellagio as a card counter.
RITHOLTZ: Tell us about that.
WEINSTEIN: So it’s — they’re very polite. It’s — you know, kicked out is more of the 1960s. But you know, Ed Thorp is a — is a hero.
WEINSTEIN: And —
RITHOLTZ: Beats the dealer.
WEINSTEIN: And “A Man for All Markets” also is, I think, a fantastic book. And so I learned how to count cards when I was a summer intern on the risk arb desk at Goldman from the partner in charge Frank Brosen, (Amos Marrone), some of these legendary hedge fund managers. And — and I got pretty good at it. And — and I went — I was sent over to London when I graduated college, with Merrill Lynch. And I found that the games in London had a weakness that the games in the U.S. didn’t. They had a certain side bet that was very crackable, and I had to kind of figure it out. There was no Internet, you know, to look up everything back then. And I became quite a skilled card counter.
RITHOLTZ: That’s really — that’s really quite fascinating. So — so from counting cards, how do you end up at Deutsche Bank?
WEINSTEIN: So the — the people at Merrill Lynch that I first worked with out of college had moved really in mass to — to Deutsche. Edson Mitchell, legendary Merrill Lynch’s head of Global Markets, wanted to recreate that at Deutsche Bank without having the deep institutional capital markets relationships. And so, he really wanted to build up trading quickly, and credit derivatives was a new market. And he had someone named Anshu Jain, who’s really been an amazing mentor to me —
WEINSTEIN: — pour a huge amount of resources into making Deutsche if not the best, the Top 2 year in and year out.
RITHOLTZ: And at Deutsche Bank, you become the youngest person to be a managing director. Tell us about that path.
WEINSTEIN: Yeah. So I — I think it’s either youngest or second youngest, let me — let me not overstep it. But still, I was 27 and usually it’s not until you’re in your 30s. And I have to say there’s so many aspects to one’s career that have to do with luck and timing, that have to go along with skill almost all the time. Sometimes you can even avoid the skill part, just be ultra-lucky.
But my — my luck was that this, market credit derivatives, basically started when I started and even a year or two after. And I was waiting for it. It was like I was waiting for it to be created because I was never going to be the credit investor that can read through the 10-K and do the deep, you know, fundamental work and accounting work that was going to — I was not going to make my mark in credit that way. I needed something more quantitative, more tactical, and credit derivatives started really in ‘97.
And — and so there was no one — there were no adults to learn from. I got to — I got to learn — learn from experience. In ‘98 with Russia defaulting and LTCM blowing up, gave an incredible path to that — those lessons. And so, Deutsche Bank kept giving me more and more responsibilities. And so, each year they promoted me.
And I think another bit of luck was not just being at a place that wanted to expand in this new area, but also Goldman Sachs had hired away my boss, an amazing guy, Ron Tanemura. And I think Deutsche was a little afraid that — that I might move over to Goldman. And so, you know, earlier than — than one would have expected, they made me an MD.
RITHOLTZ: So — so good timing, right place, right time, plus the right set of skills in — in derivatives trading. Before we move to spinning out Saba from Deutsche Bank, I have to follow up your conversation about being an intern at Goldman Sachs. You’ve kind of worked with a murderers’ row there, and you said it was the most fun you’ve ever had. Tell us about your time at Goldman, who did you work for? And what did they have you doing?
WEINSTEIN: Sure. So, look, anyone who comes to Wall Street needs to read “Liars Poker.” It doesn’t matter we’re talking now, 10 years ago, or 50 years from now. And there was a minor character in that book, David Delucia, who Goldman hired from Salomon to set up the junk bond desk. And he had an incredible love of chess. He actually is the world’s greatest — I’m going to say something that’s not going to sound so great, world’s greatest chess book collection. Hopefully, no one is gasping at that. But he has, you know, 15 century books in busts of the hand of the world champion from the 18th century. And so, he was obsessed with chess. I had met him at a — at a chess club.
And I came to Goldman Sachs to interview for a summer internship, and I had a very perfunctory meeting with the HR person. They’ve even met me, I think, only because my sister was working in Private Client Services then. So they — so I have this 25-minute meeting. The woman says, “Thanks for coming. You’re a college freshman. Why don’t you come back in three years,” and shows me to the door. And I said, “OK, can I use the men’s room?” And on my way out, I went into the men’s room and who’s standing washing his hands at the sink is David Delucia. He says, “What are you doing here? Come on back.” And that began five rounds, five interviews per round.
And finally, after 25 interviews, he calls me back and he says, “We tried to do everything we could. There’s no program for you. There’s a — there’s a program called SEO to give minorities a chance to come to Wall Street. There’s a program for sons and daughters. We just couldn’t fit you in.” And I said, it’s — you know, one thing is never give up. So I said to him, “It’s really too bad you have a program for sons and daughters, but not brothers or sisters.” And he said, “Let me try that one.” And he came back and I had another two — two sets of meetings. And they — they — they jammed me in with the summer MBA.
So I’m a college freshman and I’m there with the HBS and Wharton MBAs doing training, and then all sorts of things. And the desk I was assigned to, his desk was — we had a 3 by 2 row, so six seats. He was directly facing me and it was a murderers’ row. On my — on my left was a Bill Troy, who was really an amazing mentor to me. He was a co-founder of a fund called Greywolf Capital.
WEINSTEIN: Next to him was Jim Zelter, who’s one of the heads of Apollo. And then on the other side, Jonathan Kolatch, the founder of Redwood. And then last but not least, a guy who was named David Tepper. But he was not the David Tepper we all know and love now, larger than life. He was — he was a distressed analyst that was working for — for a group. He wasn’t this — I can’t even imagine him, you know, the way he was then versus now. He’s — he’s an incredible superstar, one of the greatest investors of all time, and I got to work with the five of them every day for — you know, for months.
RITHOLTZ: And what sort of work did they give you? Because I’ve read that Tepper used to bust your chops a little bit,
WEINSTEIN: A lot, not a little bit. So he would say, “What are we paying you for? You’re here to play chess with Delucia. That’s why Goldman Sachs is paying you?” as if it was any of his business. So what — what did he do? He didn’t teach me much about the market. That I learned from some of the other guys on the desk. But I would have to get broker quotes in the morning, Murphy and Durieu or (Garvin). I’d write down where all the bond prices were. And I barely knew anything at the time.
But what he would do during the course of the day, and remember this was Wall Street in the early ‘90s, he — they would make bets. So he would yell over at Jim Zelter, “How many — how many synagogues do you think there are in Montana?” And Zelter would say, “Not more than three.” And he would say, “I’m — I’m going to buy three. Boaz, go to the library and figure it out.” And this was — this was pre-Internet. So you want to know how many synagogues there are in Montana, it’s going to be a lot of work.
And so I would settle that bet. I would settle where interest rates ever negative. They were briefly during World War II. I would settle, you know, bets of all kinds. And in the meantime, I would also learn a lot through osmosis and by asking questions. So it was just a marvelous experience. And I have a million stories about it, so we’ll see if we have time for it.
RITHOLTZ: So — so the Salomon Brothers version of gambling was “Liar’s Poker” played with dollar bills. At Goldman, it was a trivia contest for random, unknown facts?
WEINSTEIN: You know, traders like to bet and —
WEINSTEIN: And some of the obscure bets need to be settled, and there was no Internet. So —
RITHOLTZ: And you were the final word. They — they trusted you to say — what — what Boaz says, that’s what goes.
WEINSTEIN: I — I don’t even remember if I had to show evidence or not. But I was — I was asked to do all sorts of things. And along the way, I asked dozens of questions a day. And I think that’s really important for anyone who was going to have an internship on Wall Street is that there are things you can do to annoy the people around you. But one of them is not asking too many decent questions about markets. That’s — that’s the only way you’re going to get to where you want to be. And actually, I think it will impress the people around you.
RITHOLTZ: So let’s talk a little bit about your time trading at Deutsche Bank. Before the great financial crisis, you allegedly made profits in 40 out of 44 quarters. How did you manage to be so consistent?
WEINSTEIN: I think there are a lot of investors who if you look at how they did in that timeframe, so let’s say the late ‘90s to the Lehman Brothers, the markets really were a lot easier than they — and less competitive. There were thousands of fewer hedge funds. And we were — we were relatively consistent because there also was a lot of edge in credit derivatives, credit derivatives being synthetic bonds or insurance contracts. You can refer to them any number of ways. But how to think about how to price them, mispricing in credit derivatives against equity derivatives, some of those things were really again not well understood.
And I think Deutsche allowing me to trade those relationships trading out of the money puts on a stock, compared to hedging them with a bond, which is not as crazy as it sounds, is something that I think gave us a big leg up and an ability to look across markets and find relative value. And so, we were — we were consistent. We were particularly profitable when markets were volatile, up until Lehman Brothers, which is where we had two of our four down quarters.
RITHOLTZ: That’s volatility writ large. So you’re looking for medium — low to medium amount of volatility. Once it spikes to very high levels, suddenly, all the correlations start to fail. Or why does that degree of volatility affect trading?
WEINSTEIN: It was really so specific to Lehman failing as a counterparty. So because I was inside of a bank, if you were — whether it’s interest rate swaps, or credit swaps, you were part of a daisy chain, where you buy protection on General Electric or IBM from Morgan Stanley, who buys it from Lehman. And these hundreds of thousands of swaps would remain on the books. So even if you bought and sold something, instead of being out of the trade, you would have two swaps on.
And so, when Lehman Brothers failed, we had enormous exposure to them as a counterparty, just like all the other desks at Deutsche Bank. So that made it more challenging than being at a hedge fund. But the more volatility for our strategy is really the better. And we saw that in 2020 and we’ve seen it again this year. But Lehman Brothers was very specific because if you couldn’t trust not just Lehman to pay you —
RITHOLTZ: On anybody, right?
WEINSTEIN: — Merrill Lynch, you know.
WEINSTEIN: And — and Goldman Sachs and Morgan Stanley were trading like, you know, nearly bankrupt entities, trading at credit spreads that were a thousand basis points or higher. So — so that was very specific. And I think the market has done a great job to reduce counterparty risk in the intervening 15 years.
RITHOLTZ: So let’s talk a little bit about the strategies that Saba employs. One of your funds is a closed-end fund arbitrage, where companies were either trading at a substantial discount or premium to NAV, to net asset value. Tell us a little bit about trading closed-end funds.
WEINSTEIN: Yeah. This is an amazing space. It’s one where the product has been around a hundred years. Berkshire Hathaway, in a sense, is a closed-end fund. And Warren Buffett, in particular, has talked to me and showed me how enamored he was with them right before he took Benjamin Graham’s class. So we’re going back to 1950, where he had two-thirds of his holdings in closed-end funds.
Why are they interesting? Because you get to buy a dollar of assets for less than a dollar, and there are ways to turn it back into a dollar. So the there’s 500 of them on the New York Stock Exchange. The most venerable managers all have tons of them, whether it’s Blackrock or Blackstone or PIMCO, and Templeton. And they — sometimes because they’re not cared for, because the fees are high, because the manager is not thinking about the investor, they can slip into trading for – at discounts to NAV. So objective dollar of assets valued properly in the same way that ETFs and mutual funds are valued.
You can buy a dollar for at 80, 85 cents. And if you accumulate enough of it, and if you take on an institutional approach to reading the documents, understanding the rules, as a shareholder, your rights to — to vote for a board of trustees and/or overthrow the board if they’re not doing the right thing for investors, if you buy up enough of the shares, you have a chance to make change. And we only started doing that in 2013, when they started to go to deep discounts.
Some of these, Barry, had been at discounts seven, eight, nine years. They never had a day where they were not at a discount. And we’ve been able in dozens of cases to – for thousands and thousands of investors, tens of thousands, to get the discount to converge back to NAV.
RITHOLTZ: So — so let’s talk about that approach. When I think of activist campaigns, I think of investors like Carl Icahn or Dan Loeb or Bill Ackman, how is your approach similar or different to their sort of activist investing campaigns?
WEINSTEIN: Right. So they’re finding a company where they can make change. And that change, maybe on average, is — is quite valuable. But you can debate it. And certainly, there are examples where the impact of the activist was terrible. It may, in some cases, even led to the bankruptcy of the — of the company.
In closed-end funds, it’s totally different because the medicine, the plan for how to get the fund trading to NAV works every single time. And I’ll tell you why. Because we’re not trying to remake JCPenney in the image of Apple Computer, which might or might not work or, you know, we could pick some that were fantastic successes, General Growth, to follow on with one of Ackman’s amazing longs.
On the close-end fund side, if the managers were just thinking about the investor, they could literally press a button, turn it into an ETF, which they also — those same managers, Blackrock is selling ETFs by the cartload. If they change their closed-end fund into an open-ended fund, because it didn’t give investors an exit at NAV for five, six, seven years, it would immediately go to NAV, just like all ETFs are arbitrageable if they’re trading different than NAV.
So they could change it to an open-ended fund. They could tender for shares at no discount. They could liquidate the fund and offer investors the chance to go into almost the exact same products, whether it’s New York munis or — or junk loans or — or energy equities, MLPs. There’s 500 closed-end funds. And there’s thousands of mutual funds and thousands of ETFs. So the ability to go from 84 to 100, you’re talking about a 20% return and maybe it’s the recapture of a loss that the investor, of course, if they knew enough, would want it every time.
And the only thing standing in your way is the manager that feels like they have some God-given right for that capital to be permanent capital. And if they tender for shares, that means less AUM and less fees for them. And so there’s a huge — there’s really a huge problem where the manager is putting their own interests and the board is putting the manager’s interests ahead of the shareholders, and that’s where we come in.
RITHOLTZ: So why can’t close-end funds be arbitraged the same way ETFs can?
WEINSTEIN: So ETFs have a mechanism where you can create new shares if — or redeem old shares.
WEINSTEIN: And so if it’s ever trading below, you could buy it and then redeem it. If it’s trading above, you could sell it and then create it and add — always add NAV. So there’s that mechanism that tethers ETFs to NAV. Closed-end funds, it’s like a stock. You know, you may think IBM is worth $200 a share. But you’ve got to find somebody to sell to you. You can’t call Armonk, New York and ask IBM to give you the 200 bucks. So — so the — things can trade at a big discount for very, very long time and even at a big premium.
And so — but there’s a very simple fix, which is they don’t have to figure out some newfangled way to run the company. They just need to offer liquidity like a mutual fund or an ETF that would get it back to NAV. And so, we’ve basically won all of the challenges we’ve had because we’re on the side of right. We get letters from octogenarian saying, “I was in this fund for 15 years. I never thought I would see the light of day to get out in NAV.” And we’re not doing it for them, but at the same time we’re doing it for our investors. It is a great joy to be able to, in certain market environments, pick through the closed-end fund space and find literally dollars trading for 82 cents, that you can pick up the 82 cents and turn it back into a dollar. And that’s true even today.
RITHOLTZ: So markets are efficient, they’re just not that efficient.
WEINSTEIN: Well, yeah, you need someone to come along and say, “I’m going to change that.” And the closed-end fund space really was lacking an institutional manager to do that in size. Because institutions are also – that our activists are also beholden to those same managers. They need BlackRock’s votes when they’re an activist. So they — so they might say, “I’m not going to upset the Apple Cart and annoy BlackRock to the benefit of thousands of investors.
And our investors, if I need to come to BlackRock on my regular way, activism, when they’re a big shareholder. So you have a little bit of, you know, people don’t necessarily want to fight the big asset managers, but we were very happy to. We’re not — we’re not activist in any other place. And this is one of the best arbs that — that you can find. And there’s only one entity that suffers. It’s the asset manager that goes from managing $7 trillion to managing $6.99 trillion. Thousands of investors get to make 15%, 20% gains that they would never otherwise get.
RITHOLTZ: Really, really interesting. Let’s talk about one of the most popular investment vehicles out there, SPACs, Special Purpose Acquisition Companies. Saba has about $5.5 billion in that space, is that right? That sounds like a lot of money. You’re the fifth largest SPAC holder, along with peers like Citadel, Millennium. D.E. Shaw. Your approach is different than how retail investors look at SPACs. Tell us a little bit about what you guys do.
WEINSTEIN: Yeah. SPACs are this amazing thing and that it’s all over the press whenever there’s an acquisition. It’s also critiqued, sometimes maligned for being a product that — that ought not to exist in the — in the number of offerings that exist. So — so in the last year, there’s generally been a negative 10 tinge to the — to the coverage about SPACs. And they’ve performed poorly. They’ve performed poorly when they de-SPAC.
So what’s important to understand with SPAC is the lifecycle, that they start by being extraordinarily safe. And by that, I mean, when the IPO happens, the money is taken into trust. The manager doesn’t touch it. And the trust must buy U.S. T-bills. So from time zero to the day that they are converting into the company that they’re taking public, you have the risk of T-bills, but you have some mark-to-market risk as sentiment goes up and down. That sometimes that $10 that you pay for at IPO, you know, back in the heady days of, let’s say, ARK, when ARK was trading at 150, and flying cars were — you know, were exciting people’s imaginations. Even before the SPAC manager would find someone, that $10 traded $11 or $12, or even higher.
Today, you can find — and for the last year, you can find many billions offered at a discount. Instead of $10, you get to pay something like $9.75. And one year later, or even 10 months later, that $9.75, for certain, will be worth $10. So on top of that, you also get the yield that is in T-bills, which right now is another 140 basis points. And so you could put together something, where if you screened for SPACs and you looked for high quality managers, you can still find a 4.5% return, which is a certain return.
But on top of that, in case they find a company to buy, and the market gets very excited about it, whether it’s electric vehicles, or media companies, or whatever it may be, you are a stockholder and you don’t have to take only $10 back if it goes to $15, or to the moon. That’s — that’s your profit. And so I — I really look at SPACs like an incredibly valuable product in these times we’re worried about inflation, because it’s a guaranteed return in the fours, plus an equity option for free.
And it’s really hard to find something that’s safe. In the history of SPACs, back way before, you know, the environment today where they’re actually quite a bit safer, not one time in history could you not get back trust value. You always have trust value to look to, and trust value is U.S. T-bills.
RITHOLTZ: What happens if the announcement comes out of the acquisition and the public doesn’t like it, and the SPAC trades at a discount? There is a subsequent vote about that eventually, isn’t there?
WEINSTEIN: There is a vote. You can vote for the SPAC to — to do the deal or against, but that is even a separable question from can you vote to get your money back? So you could say, “I support the deal, but give me my trust value back,” which would be your $10, let’s say, plus the yield that you made on the T-bills. So you always have the ability to get your money back.
And so then, as an investor, I have to think about, well, how – the market is not just driven by the way things ought to be. Even though it’s T-bills, if there’s 600 of these running around trying to find companies to buy, there can be a period where because of losses one is suffering in their portfolio, you might dump your SPACs and put pressure on that market. So you to think about how cheap could SPACs get. Even if they’re basically the safest investment I know of, T-bills in a box and with a 10 — 10-month, 11-month average life, you know you’re going to get your money back. But in the meantime, you have to be ready for some mark-to-market pain.
RITHOLTZ: Let’s talk about tail hedging and crest protection funds. How do you find efficient tail protection? And what’s the difference between paid for tail protection with a zero carry and more expensive tail protection?
WEINSTEIN: Yeah. So I’ve been running tail protection funds since 2009. And so, I’ve seen many hundreds of investors and heard from them, how are they thinking about it, how much premium do they want to spend, do they look at it as an insurance policy where, you know, just because your car doesn’t get stolen, or house doesn’t go on fire, you’re — you’re not thinking that something bad happened. You bought a policy and you spent it, and it’s portfolio insurance.
And then there are investors that say, “Well, look, I don’t have a budget for that. I have to keep up with the Joneses. I have to make my expected return. So is there a way that — since I’m not going to do the first one, can — is there a way that you can find something that will have very low negative carry or burn or bleed, some people call it. And — and so in the credit sort of market, in the last two or three years, there has been, in my view, a way to have your cake and eat it too. They have a very low cost or no cost portfolio of tail protection and still benefit. And so in 2020, you know, this strategy was incredibly profitable, even though it didn’t have the negative carry that one assumes they need to get a big payout.
RITHOLTZ: So that sounds a bit like a free — free lunch. How do you get tail protection with — with no cost to carry? What risks are you assuming in order to execute that?
WEINSTEIN: So there — there’s — there’s no free lunch anywhere, not even at Bloomberg. So I —
RITHOLTZ: Oh, there’s a free lunch.
WEINSTEIN: Oh, I’m getting free lunch after this?
RITHOLTZ: Yeah, absolutely, when we’ve done.
WEINSTEIN: Okay. At least, we got that going forward.
RITHOLTZ: So that’s the only free lunch on Wall Street.
WEINSTEIN: Well — so the free lunch is — is not free. You are making a bet. But what I see now and for the last few years in the credit space, is that there is not enough differentiation between safe companies and less safe, or safe and dangerous. And by that, I mean if you look at the credit spreads of 50 different companies rated BBB or single A, some of them are ultra-safe. They go by the names of McDonald’s, IBM, AT&T —
WEINSTEIN: — you know, Verizon, Disney. And — but the thing is that banks — Federal Express — banks make loans to these companies, when Disney when — when IBM bought Red Hat, or Philip Morris bought Juul. And so banks have exposures. And when they go out and buy CDS, they are not — they are not a brilliant hedge fund manager saying, “What’s the next Enron like Jim Chanos?” They’re saying, “What’s in my book? And I need to hedge it.”
And so the CDS spread on some of the best companies in the world, market caps between $100 billion and $300 billion, trade at very similar levels because that upward pressure pushing up the spread to names that they’re — the banks are not pushing up higher. And so, you can set up a portfolio where you go long risk —
WEINSTEIN: — to the IBM’s of the world, and take that carry and buy protection on companies that are not as safe. And so just to use the example of 2020, I was amazed coming into the COVID environment where McDonald’s had the same credit spread as a BB rated online travel company called Sabre.
WEINSTEIN: And Sabre, BB, was trading at 25 basis points and McDonald’s is trading 25. But if you pay 25 enough times, it can add up. So we — we put on these trades, you know, imagine a book of 30 or 40 names.
RITHOLTZ: So you’re — you’re selling the McDonald’s and buying the Sabre?
WEINSTEIN: Exactly. And — and of course, Sabre was negatively affected by COVID. But even today, Sabre trades at 500, and that’s where McDonald’s trades back at 25. And so, there is a free lunch, so to speak, that I didn’t see until 2019 or ‘20, which is that credit, when it got ultra-tight because people were so confident that the Fed had the markets back and the Fed did extraordinary things. You know, since 2008, that credit spreads were two clumped together. And one could pick through the portfolio, find the names that would be good tail hedges and the names that would be bad ones, and set up that trade. And it’s worked in 2020 better than I thought and it’s working again in 2022.
RITHOLTZ: So to put some numbers on that, I recall reading the first couple of months of 2020, that fund was up like 99% to start the year. You gave a little bit back, but not a whole lot. I think you finished the year up 80%, some crazy number like that?
WEINSTEIN: So we — we have different funds, and not to speak about any — any in particular, those numbers are in the frame. Correct.
RITHOLTZ: So — so pretty close to a zero carry, pretty close to a free lunch. You are assuming some risk, but it sounds like not a lot of risk.
WEINSTEIN: Well, you know, I’m agnostic as to which — which strategy is right. It’s really up to the individual. If you say, “Well, should everyone have insurance?” Should we walk around with — you know, insurances sometimes were mandated. You want to get a car, you need insurance.
WEINSTEIN: In portfolios, you get this problem where people don’t necessarily think they have a budget for it. If they’re — and if they have that constraint, I think paid for tail protection is a whole lot better than not having anything because look at what’s going on out on the market. And I’ve been seeing from the last year, whether it’s from state pensions, we just got one onboard last month. And university endowments, incredible desire for strategies that will pay off when there’s volatility.
RITHOLTZ: Quite — quite interesting. Last question about — about Saba Capital Hedge Fund, where did the name Saba come from?
WEINSTEIN: So I was at — I was at Deutsche and there were a lot of Deutsche prop groups, and I wanted to — to brand it. And so, I was trying to think what’s easy to say, easy to spell and hasn’t been taken. And there wasn’t really much — much left and Saba means grandfather in Hebrew. My mother was raised in Israel after the Holocaust. And her father, my Saba, saved the family, saved her, you know, and saved a lot of innocent people, hid them. So I really felt, as a kid, an incredible debt to — to him and I wanted to honor him by — by calling it that. So we named it that at Deutsche. It was called Saba Principal Strategies. And when we lifted the team out in ’09, we kept the name. So it’s Saba Capital.
RITHOLTZ: And if I recall reading correctly, your — your grandfather built a double wall, a false wall in order to hide people from the Nazis that were looking for people’s children, is that right?
WEINSTEIN: Yeah. So he was a carpenter, and he had a hardware store after the war in Israel. He didn’t have any wealth of significance to speak of. But he was — he had a lot of vision. And there was a moment — my mother was born in July ‘41, in the Warsaw Ghetto. And sometime around ‘42, he realized he needed to get out of there. And he got fake papers that showed he was a Gentile, with his wife, and my mother was hidden on a farm. And so, yes, he was a real hero. And I actually, just a month or two ago, got to take my eldest daughter to Yad Vashem n Israel and — and explained to her a bit about the history.
RITHOLTZ: Really, really intriguing stuff. So — so it made a lot of sense to spin out and be a freestanding fund instead of being part of a larger bank and all of the baggage that comes with that.
WEINSTEIN: Yeah. I — I love my time at Deutsche Bank. But I’ve taken on enough responsibility that when my boss left and left the bank, and he’s actually now the head of the Vision Fund at Softbank, I had to make a choice. Am I going to be a manager or an investor? And I chose investor. And that was in late ’07 and the spin out happened early ’09. And along the way came Lehman Brothers, which was, you know, —
WEINSTEIN: — just a mind blowing experience. I was at the New York Fed, the weekend Lehman failed. And you know, we lost quite a bit of money in a way, like — like most desks or all desks, but — but incredible — incredible experience and lessons too.
RITHOLTZ: What — what were you doing at the New York Fed that weekend?
WEINSTEIN: It looks — it’s going to sound so silly. Like, they called us in and they — they wanted us to came out on the weekend. If Lehman was closed for business on Monday, if it was done, could you — on Sunday, the day before, could you unwind all sorts of trades, contingent on them not being there. Like, let’s — let’s do a pre mortem.
WEINSTEIN: What can we do to reduce the amount of counterparty exposure? And it was really like deck chairs on the Titanic.
WEINSTEIN: I think Deutsche Bank had hundreds of thousands of swaps facing Lehman. And it was like we were able to, that weekend, unwind maybe a dozen of them.
RITHOLTZ: Oh really? And that’s before we start talking about one step removed, where you have counterparties, who then threw it off to Lehman on top of it, or you’re including that in that list?
WEINSTEIN: No, just direct exposure, there were hundreds of thousands of rates, FX and credit swaps. I was in charge of credit. So we were there. I was in a room of — you know, all the major banks sent their head of credit. And the other rooms had the heads of, you know, mortgages, head and CEO. But I got in on a Saturday at 1:00 PM and I left maybe Sunday at 5:00 AM.
RITHOLTZ: So I’ve heard people complain that the Fed made a terrible mistake not rescuing Lehman. But no matter how I’ve looked at Lehman Brothers, hold aside the fact that they were technically insolvent, it sounds like it was all but impossible for Lehman to be rescued. There was just far too much risk, far too much exposure for everybody. And it was really sort of a mercy killing.
WEINSTEIN: You know, I think if the Fed knew what was going to happen in just the intervening days with AIG and the others —
WEINSTEIN: — I think they would have rescued it. The price tag would have been a drop in the bucket compared to what they eventually had to do with all the different programs and everything that came after it. So — so I think that there was a moral imperative, they thought, to not rewarding greed and treating risk like it’s always going to get bailed out. But we learned that the Fed couldn’t see in front of their nose because only days later, we have Fannie and Freddie and AIG —
WEINSTEIN: — that needed massive bailouts. And so, Barry, I don’t know the price tag. But whatever it was, I think it was a tiny drop compared to the damage.
RITHOLTZ: You know, I always thought a lot of people don’t remember that Buffett made an offer to Fuld to bail out Lehman and Fuld rejected him. And ultimately, Buffett ended up taking a small piece of Goldman. But I always imagined that the conversation with Bernanke and the desk was, “Wait, he turned down Buffett’s money. How can we give money to this yutz if he turned down Berkshire Hathaway?” And I — I always felt that was the moral hazard that “You had an opportunity to save the firm, you refused. Sorry, we can’t help you.”
WEINSTEIN: Yeah. So they did take money, if I’m not mistaken, from a Korean bank, and I think it was just Buffett’s terms were worse than the Korean bank. But of course, you’re right. They should have taken it from — from both because once a financial institution, with such massive leverage, starts to unravel, it’s — it’s self-fulfilling. It has its own — the decline has its own gravity. And you take it from the Korean bank and you take it from Buffett, and you — you know, you count your blessings that you didn’t go under.
RITHOLTZ: Right. This would have been after he already rescued Salomon Brothers. It’s the financial sector good seal of approval. Lehman might have — might have survived if he took the money from Buffett. Who knows?
WEINSTEIN: Yeah. I don’t think they had such large losses that couldn’t — you couldn’t put Humpty Dumpty back together again. But so — so you know, I was already planning the hedge fund from — well before that. And so when I left Deutsche Bank in February, around February, middle of February ’09, by April 1, ‘09. So only six weeks later, I was already up and running with the fund that I’m prepping.
RITHOLTZ: Wow. Saba has had some spectacular trades. Let — let’s talk about some of your most successful ones. I mentioned earlier, the tail fund practically doubled in 2020. The fund itself was up 33% in that year. How does having one of your strategies up a 100% affect how you think about trading? Do you just leave it and — and not interfere? Or are those sorts of returns to the mean reversion lights start flashing and encouraged you to start paring back a bit?
WEINSTEIN: Right. So specifically in the tail fund, since investors in that fund are using it for a purpose, they’re using it for a hedge, I don’t want to be the one to say, “Hey, the blows are in, let’s — let’s take it off.”
WEINSTEIN: And you know, people’s crystal balls are, I think, always cloudy, if not worse. But in those environments, it’s especially hard to see. I would say when we talk about 2022, this is another one of those hard-to-see environments. So I’m not generally tweaking that too much. In our flagship fund where tail doesn’t have to be the biggest part or, you know, and we had very similar returns.
We did find, in that environment, incredible mispricing. And so we were able to monetize some of the tail protection and invest in then, you know, most mispriced things, which was in relationships between the credit derivatives and the bonds, or various ETFs. Basically, the bond market broke in 2020 and there was an incredible opportunity to do things that I didn’t even think I’d ever see again after ’08.
RITHOLTZ: Really, really intriguing. Let — let’s talk a little bit about Bruno Iksil aka the London Whale. That trade lost over $2 billion for JPMorgan. You were on the other side of that trade and ostensibly picked up some of that, not all, but some of that $2 billion. Tell us a little bit about the London Whale trade, which I recall reading, you’re discussing at a conference before everything went to hell. Tell us about that.
WEINSTEIN: Yes. And the eventual price tag, well, they had started to estimate it too. I think they acknowledged some number like $6.6 billion, ended up being even a lot worse. So I am – I noticed — being that we’re looking very closely at mispricings in derivatives, I noticed that an older series of the index, the creditor of index, by the way, I should say, is the most liquid product in fixed income, at least certainly in credit. The investment grade 1 trades about $50 billion a day. It has basically zero bid offer cost. You can get in and out very cleanly in billions. And that’s why firms like Bridgewater and AQR use it in enormous quantities.
Back then, I noticed that an older series, one that was not current anymore, retained having a lot of interest. And that interest all came from one counterparty according to market sources. And one counterparty was kind of driving the interest in it. And one thing that I noticed was that it was priced very differently than the other. So if you — just imagine the S&P 500 and it has a net asset value of 1. Well, it’s going to trade right at 1, or someone is going to arbitrage it.
Now, if you have the older series, before they changed three or four names, if the current series is at 1 and the older series is at, you know, 0.9 or something, that’s — that’s really strange that they have this kind of difference, where the sum of the parts is not the same as the whole. And I — and I noticed that it was — it was too low. You’re able to buy credit protection for too low a number, comparing the pieces to the whole. And I wanted to understand why. And through a lot of work, we started to see some strange patterns. We knew that it was a trader in London that had, by all accounts, a 100% of this.
WEINSTEIN: There was — it was basically everybody against one. And — and we noticed patterns where in the final days of a week or particularly the final days of a month, there would be unusual trading, which smelled like someone trying to mark – mark their book.
RITHOLTZ: Paint the tape. Yeah.
WEINSTEIN: Yeah. You know, I’m not saying that’s what they did. But that’s what the data showed, that there was something going on. And so we took the other side. And as you said, I went to speak at a conference for boys and — boys — Girls Harbor, I think the charity was called. And I wanted to come up with something accessible. I wanted to talk about an index, not some weird, single company. I go to present and it’s at JPMorgan. The conference was held at JPMorgan.
And I talked about it and I say, “You know, you have this trader that’s really taking on everybody. And it’s — and we can all do the same math. And why is he trading there?” And it took about six months, but eventually cost the bank $6 billion. And so despite — you know, Jamie Dimon, highly regarded as one of the great bank CEOs of all time. The idea that the bank could have lost that much on — by the way, a notional quantity. So that’s the loss, $6 billion. The quantity probably $300 billion to $400 billion, and out of some London desk, taking risks to U.S. credit, it really is mind-blowing.
And so when it all ended, someone from JPMorgan came over to our office, and we were one of the larger people on the other side, but as you said, we were not nearly their size, came over with a piece of paper and said, “Write down your number for letting us out of this trade. And if you do, we’re going to have an extra great relationship from now on.” I wrote the number down, we traded. It was — we traded $15 billion in one — one trade.
WEINSTEIN: That was the size we had. And we have a good relationship with JPMorgan.
RITHOLTZ: I would imagine you would after being on the other side of that trade. Did they do that with all of their counterparties?
WEINSTEIN: I think so. Look, we weren’t — it was nothing personal. It’s just — if someone — again, like closed-end funds, someone is selling a dollar for 75 cents. And — and it’s you — that’s our bread and butter. And especially the — the SPACs, it’s a little easier because you know you’re going to get NAV back. But this one is tougher because, you know, we’re tiny compared to JPMorgan.
WEINSTEIN: And — and so we were one of four or five counterparties that were quite large. In the trade, we made a few a 100 million dollars from it, but — but it was more the detective work to find it than the — than the actual game that I think is — is what stays with me.
RITHOLTZ: Really, really quite fascinating. Let’s talk a little bit about Evergrande, which has become a bit of a debacle over in China. Tell us a little bit about your involvement in that.
WEINSTEIN: So I thought, Barry, we were going to be talking about my greatest trades. And now, you’re mentioning a giant loss-maker. So let’s do it now.
RITHOLTZ: Well, this is — this is a great trade, just not a positive one.
WEINSTEIN: No, it’s only fair. So Evergrande stuck out to us as really interesting, because we run a screen that says “Show me the credit spread of a company, what the — you know, what the spread over Treasury is or LIBOR or SOFR is. And chart that against the market cap of the company, so how big it is, and how volatile the stock is,” you know, if you look at the equity options.
So if you look for companies that have a credit spread like Evergrande of over a thousand basis points, it did — it had that credit spread when it was totally healthy, when it had a market cap of $40 billion, and holdings in various entities that are not even in the real estate space like of — like electric cars. You know, on top of being the behemoth in the Chinese property market, you have $40 billion of equity, but you have a credit spread of 1,100 basis point. That’s basically unheard of.
And you have equity options that are trading at a pretty attractive level. If you wanted to buy that bond, you have 1,100 basis points. And if you go and spend that 1,100 in equity puts, you can hedge yourself quite a bit on the — all the way down from par down to, you know, near zero.
RITHOLTZ: So — so why didn’t that trade work out?
WEINSTEIN: So we didn’t hedge yourself down to near zero. We — you know, we thought that the — we didn’t think the company — the company was going to blow up. And we also thought that there would be decent recovery value, and there may still be, by the way. But the way everything went south so quickly, we ended up having not enough hedge on and it was a — it was a loss-making trade. But I would say even just it — these kinds of screens can help identify things that become problems.
And we’ve — we’ve seen that in a number of cases where — you know, the markets today, Barry, should be more connected when you think about the passage of time and technology. But when I was at Deutsche Bank, the credit and equity departments were on different floors.
WEINSTEIN: And they spoke to each other, but you had this segmentation. And you assume over time, that things will get more and more connected. But it requires different disciplines, different mandates. And so sometimes you can get a very high credit spread and a low equity vol, or a very low credit spread and a very high equity vol. And that might point to something that can lead to, whether it’s us doing the RV, or someone saying, “I see a short here or I see along here.” And so I really do love looking across markets for clues.
RITHOLTZ: And the reason I asked you about Evergrande is I began my career on a trading desk, and anybody who only talked about the winners and never talked about their losers, I know they were full of crap and I couldn’t pay any attention. But people who are really skilled and polished traders, their losses are a badge of honor and they treat it that way. And so that’s why I had to ask you about that.
Following the London Whale, let’s talk about a couple of other things you do that I think are really, really interesting. You mentioned closed-end funds and some mispricings in that space. In my prep for this and you might have referenced this to me, Bill Ackman was a Deutsche Bank client for a long time. He has some closed-end funds, some of which run at a pretty substantial discount to NAV. Tell us a little bit about trading with Ackman.
WEINSTEIN: Sure. So I — I met Ackman in ’02 and I went to go see him after we had done some trades in MBIA, the bond insurer and —
RITHOLTZ: The defunct bond insurer.
WEINSTEIN: Yeah, basically. So I went to his office and there were boxes piled to the ceiling. They were full. They were not for show of the work he had done on MBIA. And so, I saw firsthand how he understood that aside from looking at investing that, you know, is this an attractive stock? Could it go up 20% or 30%? He also understands when there’s potentially ways to make 50 times your money or 20 times your money like he did in MBIA, and he’s done in General Growth and Coupang, and you know, things like that.
His closed-end fund — because it happened to have launched at a time where he hit a drawdown as all investors, you know, great and not so great do, his closed-end fund has stayed at a very large discount. So I’ve talked before about buying stuff at 80, 85 cents on the dollar. The Ackman’s fund is trading at about 68 cents on the dollar.
WEINSTEIN: But that’s not something that we, as activists, can — can take on, because he’s already set the rules so that he has the majority of the voting rights. So there wouldn’t be a way to — for the activist — to have an activist —
RITHOLTZ: You couldn’t force a result on him.
WEINSTEIN: Yeah. But at the same time, you know, he has — to his credit, bought back a lot of the stock. And — and he’s also, you know, done quite well over the last few years. Leave — leave aside, you know, a recent trade that he exited. But he’s been amazing investor. He’s really, in my view, amazing for understanding asymmetry, because I’ve seen whether it’s Enron with — you know, the incredible work Jim Chanos did to — to find Enron. If you go in short stock and make it a 3% position and it goes to zero, OK, you made 3%.
But credit derivatives, if you bought protection in Enron and you only have to pay 1%. Even after Ken Lay was out, it only costs 1% a year for five years. A year later, it’s gone and you — you turned one point of premium into about 95 points. You made 95 times your money. That kind of pay-off profile is a different skill set than the skill set of analyzing companies. And I see examples where people get things right, whether it’s Enron or Lehman, but they — but it didn’t change — it didn’t change their — the outcome for their fund that year.
And I think Ackman, a number of times, has shown he really gets asymmetry. Now, his closed-end fund is at a very big discount. And if one were looking for a top quality manager, to be able to buy in at that discount, I think is — is really compelling. But there’s nothing we, as activists, can do to narrow the discount.
RITHOLTZ: Really interesting. So I mentioned earlier your tail funds. There are some pretty famous people who run similar, or I guess not so similar tail funds. Let’s talk about Nassim Taleb and Spitznagel’s funds, Integra, Integral, I don’t remember the name of the fund. How does their approach differ or is similar to your approach?
WEINSTEIN: Yeah. So Universa.
RITHOLTZ: Universa, that’s what it is.
WEINSTEIN: So, look, I’m here. You want to have good stories you want to hear?
WEINSTEIN: Hear the — so I — I’ve never — I’ve never been — first of all, let me say, before I say never been a fan of, Nassim Taleb, his IQ is twice as high as mine.
RITHOLTZ: Brilliant guy.
WEINSTEIN: Brilliant guy.
WEINSTEIN: He’s the smartest guy in the world, just asked him, OK. And — but he — but he happens to be — but he happens to be super smart.
WEINSTEIN: I don’t know if he’s a smart guy. But anyway — but you know —
RITHOLTZ: I’ll just ask him.
WEINSTEIN: — I had — I had a couple of experiences from afar or from close, I’ll share with you, so we can have a little fun.
RITHOLTZ: All right.
WEINSTEIN: And so I’m at Deutsche Bank, and I’m still a pretty young guy. I’m speaking at a conference that we’re having in Barcelona. And he’s the lunch speaker. OK, I’m the Deutsche, whatever, speaker, and he’s the entertainment for lunch. And — and so we’ve been all given in our — in our satchels, his book, “Fooled by Randomness,” which is a — it’s a legendary — it’s a classic.
WEINSTEIN: I had not read it. So — so there — he’s showing up. I’m sitting with him at some cocktails. And — and I read the flap jacket. And Peter Bernstein, who was one of my — he’s written one of the great books about — about risk in finance.
RITHOLTZ: “Against the Gods.”
WEINSTEIN: I mean, when I just say those words, it makes —
RITHOLTZ: Spectacular, right?
WEINSTEIN: I want to reread it when I got —
RITHOLTZ: Right, absolutely, 100%.
WEINSTEIN: So Taleb somehow has gotten Bernstein to say the most wonderful things about “Fooled by Randomness.” And so what am I going to say to Taleb? I don’t know him. He sits down and I say, “You know, I haven’t read your book, but — but Peter Bernstein on the flap jacket, he said — you know, he said something that was so strong and I really loved “Against the Gods.” Now, there’s a range of answers that one can say back —
RITHOLTZ: Thank you. I appreciate it. I hope you enjoyed the book.
WEINSTEIN: Do you have any others, Barry? Because I’ll tell you what’s not in the range.
RITHOLTZ: How dare you not read my book.
WEINSTEIN: OK, that’s in the range. That’s not the range, but it’s not in the range when someone says that to another person at that venue and I’m from Deutsche, and common decency. He says, “Peter Bernstein is not a very intelligent man.”
RITHOLTZ: Which, by the way, could not be further from the truth.
WEINSTEIN: Even if it were true. So that the — the — the hubris, the arrogance, the — so — so anyway — so look, let’s fast forward a number of years. I’m now at a different JPMorgan conference, not talking about the London Whale. They’ve had me back and I’m speaking, and I get off the stage. And now, they’re introducing Nassim Taleb. And instead of — you know, with me, they’re like, “OK, play chess, he’s Deutsche Bank, whatever.” With Taleb, they say, “He speaks 26 languages,” and they say 50 other things. And he’s given it to them, “And he speaks 26 languages. Put your hands together for Nassim Taleb.” He gets up and he says, “I have to make a correction, I speak 27 languages.”
WEINSTEIN: But he’s not kidding. He’s — he needs to make that correction. And so I — I — he’s brilliant, but you know, I have to tell these two stories because we got to keep it interesting. Onto Universa, they have said to Bloomberg, in fact, to Erik Schatzker and to many other places, that they made 4,144% in 2020. 4,000, OK. And I want —
RITHOLTZ: But — but is that — that’s a trade annualized. That’s not their total return for the year. They can’t possibly be talking about those numbers.
WEINSTEIN: Well, so that’s the thing. If I’m talking Fahrenheit, and all of a sudden you want to talk — forget Celsius, you want to talk —
WEINSTEIN: You want to talk Kelvin?
WEINSTEIN: You got to say Kelvin. So — so there — because you end up having false expectations and reporting, you know, by the, you know, innocent journalists. But they were not saying annualized. What they are saying is, “We spend premium as we go.” So we spend — let’s say, it’s 20 basis points a month. So 0.2 12 months — well, every three months, we’ll spend 60 basis points, so spend 2.4% a year. And on that, that, you know, batch of protection, we paid 20 cents on. We got back 40 times our money. We got 8 points. So 20 cents went to 8 points.
Now, the batch beforehand and the batch before that, and before that, that expired worthless. Did you see them say they lost 100%? They lost 100%? They lost 100%?
WEINSTEIN: So we have investors who say, “Well, how do you make 4,000%?” I mean, my god, like people who make 40% are legends. So if you run around, not just misquoted about 4,000, but affirmatively talking about it, I think you’re doing the investment space a disservice to talk about returns like that. When we talk about our returns, and in the way that you’ve talked about them, it’s all the exact same way that we know returns to be, which is return on assets.
WEINSTEIN: Not return on — the return you made on the AUM, not the return on an options trade you did. And so I did it for fun. I looked under their framework of what the return was for us. It was not 4,000%. But because we had very little negative carry, just like we were talking about before, it was actually 12,000%.
RITHOLTZ: There you go.
WEINSTEIN: But it’s a gobbledygook word.
RITHOLTZ: I’m sure the SEC would bless those sort of numbers in a public document. They’d be thrilled with it.
WEINSTEIN: I can’t speak to that. But we — you know, for — we —
RITHOLTZ: It’s a silly way to — to boast about your returns.
WEINSTEIN: I think so.
RITHOLTZ: So — so let’s talk about another big brain. Nobody bust my chops better than Cliff Asness. I love mixing it up with him on Twitter, not because I expect to win. But if I could survive 15 rounds with him, that’s a victory. That’s more than a Pyrrhic victory. It’s like, all right, I defended my position. We disagreed. But at least he didn’t say, “You’re an idiot. Go away.” And I love Cliff, I find him to be immensely amusing. Sometimes he and Taleb get into these bizarre fights. Tell us a little bit about what you’ve seen with Asness and Taleb doing battle.
WEINSTEIN: Yeah. So you picked another guy who’s twice as smart as me. But he handles it with grace and humility, how bright he is. And he’s — and he sounds like a vaudeville comedian. He’s — he’s one of my favorite people to listen to.
WEINSTEIN: So — so he wrote a paper that tail protection is — is not additive to portfolios and that caused Taleb to really critique not only the paper, but also AQR’s returns. And they got into a big Twitter spat, which Cliff seems to — seems to do every now and again. And I was reading it really as an outsider looking in. But as being an expert in some of this, and I feel like some of the — some of the praise that Taleb was giving himself was — you can’t just look at what this 2% that we invested out of your 100 cents. You took two and bought tail protection did.
He says, “Well, what did it allow you to do with your 60/40 plan? Instead of being 60/40 equities bonds, you could go 98 or 97 equities and 2% me. And because of me, you got to have all these stocks that beat bonds, you know, mercilessly until — you know, for quite a long time with the S&P,” and he picked the S&P, no less. And so — so when he was comparing the apples to apples, he was taking the gains that his tail protection allowed by adding on top of it the gains of S&P over — over treasuries. But he has the benefit of seeing that this was a world where S&P is up and to have beaten Treasuries. What if S&P had done worse than Treasuries? That wouldn’t be true.
RITHOLTZ: Which — which they did for long periods of time over the past 40 years.
WEINSTEIN: Yeah. So it’s a little bit like — like why — when people have that intuitive understanding of why the Monty Hall problem works. Why does that — behind the door, there’s a prize, behind one door, there’s a lion. And the guy shows you — the host shows you the empty door. Do you make the switch? It’s because the host already knows that there’s nothing behind that door. And so you already know that anything you can say that allowed you more S&P risk into the biggest S&P rally —
RITHOLTZ: After the fact.
WEINSTEIN: You know, so I think — maybe I kind of am in between because I think if Cliff is saying that tail protection is not worth it, well, I beg to differ there. But — but they had — yeah, you’re right. They had quite a — quite a big spat, something that I — I have, thus far, you know, managed to avoid in my — my career.
RITHOLTZ: And yet you’re inserting yourself right into the middle of it.
WEINSTEIN: Well, you know, I came on your show and I want to make it interesting, so yeah.
RITHOLTZ: I appreciate that. I really appreciate that.
RITHOLTZ: So — so you’ve mentioned certain phrases which are really books that Taleb has written. We’ve talked offline. We’ve talked about the fragility of certain institutions, certain sectors, and certain investment strategies, as well as the advantages of skin in the game. These are two really big concepts that Taleb has championed. Tell us a little bit about both of those issues relative to the world of investing.
WEINSTEIN: Yeah. So look, I think that skin in the game, so the hedge fund manager having enough exposure, so that if the fund is going to do very poorly. And we’ve seen a number of funds this year, even, you know, news breaking today about a fund that is down 44% this year. That you want, not from schadenfreude perspective, but just from an equity — equity and fairness perspective, you want the manager to have a lot of money invested in their funds, so that they’re treating that fund like they would their own personal net worth and not —
WEINSTEIN: And I am — no one forced me to do it. But I’ve had effectively all of my net worth that is in investments in Saba funds because I want to eat my own cooking. I want to have skin in the game. I think it sets the right example. And also, you know, it’s not so bad to be able to invest without fees in a fund which, at the moment, my — my — my own fund is the only one that is not charging me fees. So — so I’ve — and I’ve a number of different strategies. So I’ve really put skin in the game into practice by having something in the upper 90% of — of my of my net worth.
Now, there have been times where I see Venture Tech and all sorts of growth stocks going up a lot, which is not my expertise and I wondered should I diversify. And so I’m having these thoughts right now, Barry, like should I into this giant swoon, you know, diversify, bid into things with other managers or index funds that I don’t have any personal domain expertise like tech. But thus far, I’ve really eat my own cooking. And the last few years, it’s tasted very good. There have been years where it didn’t.
And I think to the second point about fragility, you do see a lot of funds that go through periods where they’re amazing. And then they’ll hit a bump. And if the bump lasts more than a year, year and a half, sometimes they’re just done. And without mentioning any names, there are long list of funds that were more than $10 billion, had some kind of style drift issue, or some — whatever issue and — and they’re over in a year. And I think it is a fragile business. We’re seeing a fund now trying to figure out what to do, should it launch a new fund? Should it shut down the old one after a long success, and then and then a failure?
And I think that having been through drawdowns myself, I went through a period from the time Mario Draghi said, “Trust me, it’s enough,” and I should have trusted him. So from that period of, let’s say, June 2012 to maybe June 2015, I couldn’t — you know, I couldn’t get anything right. And to be able to come through that and out the other side, and not succumb to the — to the fragility problem, hedge funds is actually something I’m more proud of than the — the good years we’ve had. And I can, maybe even if you like, tell you a bit about why I think we survived.
RITHOLTZ: Sure. Go ahead. Why — why do you think you survived?
WEINSTEIN: I think the first thing is you have to love what you’re doing. And I think back to that three-year drawdown, and it was not severe, the losses were not severe per year, it just took a long time, I loved even then coming into work. I love the markets. I’m a — I just —
RITHOLTZ: You’re a junkie, it’s obvious.
WEINSTEIN: It’s the greatest puzzle. It’s — it’s a — it’s — it’s a game, but it’s important. It’s — it’s people’s financial future and I love it. I love it and it made it — it’s — it’s especially fun when you’re winning, but it made it very tolerable even when I — when I wasn’t. And I have a great competitive drive to — to not give up. And maybe some of that is the fortitude, even just from thinking about my grandfather, and so forth.
And then — and then, secondly, you have to be so thankful for where you are, that you could be in an industry that has this type of compensation, that when times are tough, you need to actually dig into your pocket and fund the business a little bit. I think there’s some managers when it got rough and they didn’t have bonuses to pay people, they, you know, folded.
And when — in our drawdowns, we went through some periods where I was willing to invest back into the firm, earn nothing in those years for myself. But knowing that I have all the upside of things turned around and I think it’s surprising to me that more institutions don’t make that investment. Even if it doesn’t look amazing in that exact moment, but they — there’s a lot of enterprise value that is there for that turnaround. And — and so, you know, that’s my antidote to fragility is actually to invest.
RITHOLTZ: And those drawdowns, I’m going to assume, were fairly modest. You weren’t cut in half and trying to think about “How do I get back over that high watermark?” I’m assuming you had faith in the process and said, “The environment is changing, and we just have to ride this out.”
WEINSTEIN: Yeah, 3%, 6%, 9%.
WEINSTEIN: Yeah. And also, the other thing is, in my world, so the credit market could not be more different than the equity market, in a way that people I think don’t appreciate. So let me tell you, so if I’m short, and credit spreads are going tighter and tighter. So now let’s say the spread on high yield is 2.5% or 3%. There is a boundary condition where it’s not going to go below X. There’s still going to be a couple of defaults.
WEINSTEIN: Whereas if you’re short a stock, you know, think GameStop, the stock doubles. You have to recognize your risk more than doubled, or at least doubled, because now you have twice the market value. And the more it goes up, the bigger opposition is. The more credit protection, the more shorting bonds, let’s say, goes against you, the smaller your exposure is. And so, one of the things about credit is it’s an — it’s an accordion. There’s a boundary. And in in those moments where owning volatility and owning protection was not the best thing to have, credit spreads were ultra-low. And really, you just couldn’t lose much more. And maybe that’s part of where the confidence came from.
RITHOLTZ: So — so let’s talk about — you mentioned equity. Let’s talk about another fund that did spectacularly well in 2020, but seems to stumbled then there’s no clear path to recovery right now, ARK. And by the way, I’m not part of the schadenfreude crew who don’t like her. I think she’s really interesting and innovative and has the, you know, conviction and confidence in her beliefs.
In 2020, she was the top performing fund. I think 160 something percent. No one was even close. Number two was like 50 percentage points under her. But since the fund peaked, it’s been almost straight down, she sold off. I think she’s excess of 60% down, maybe even 70% down, and filled with things like Teladoc and Netflix and Tesla. A lot of the big winners became big went losers. I don’t remember she’s in Netflix, but certainly Tesla, Teladoc. The bitcoin 500,000 called, the 50% a year for the next five-year call. She seems to have lost her way. What are your thoughts about that sort of self-confidence heading into what’s been a reopening buzzsaw?
WEINSTEIN: Yeah. So we’re actually tracking ARK quite closely because the ARK portfolio is not altogether different than the list of companies that SPACs are requiring. They’re all future, innovative, unprofitable tech companies, think of flying cars. And — and so we’ve — we’ve seen what happened to ARK. And one thing we like about — about SPACs is that all the deals that will be struck here, from now on, are going to be struck at the current market. Whereas in in ARK, you’re really hoping for it to return to the glory days of — of the past.
But I think there are some good deals that can be made in this more difficult environment. And so those warrants you own in a SPAC are struck at the market. They’re not out of the money. If you think about if you had a long-dated option on — on ARK, that’s very far to the money now.
Now, as far as her confidence, I do witness, you know, someone is down that much. This is a humbling market. And I — it’s not particular to Cathie Wood. But I think I’ve seen a number of cases where people are way too confident about the future. And if they were up 50, it’d be one thing. If you’re down 65, probably there’s — there’s an extra dose of humility. So one thing I thought was kind of telling there was in February, she spoke, I don’t remember which — which program it was on, and said some of those calls you mentioned, Barry, about bitcoin and 30% a year.
WEINSTEIN: And by the way, you know, great claim should be backed by a great evidence, said (Charles Hagen).
RITHOLTZ: Sure. Right.
WEINSTEIN: So I didn’t — I didn’t see the evidence. But — but — but she said also that — something that really kind of — it’s a pet peeve of mine. She said, “The lows for ARK were in January,” and this is in February. Guess what happened within two days?
RITHOLTZ: Another leg down.
WEINSTEIN: So you know, you want to say something about what will happen in five years. We’re not going to remember in five years, whether you’re right or wrong. But we’re going to remember when the thing you said wouldn’t happen happens the next day. And I saw it also a few weeks ago, one of the big banks said, “Oil will not be lower than a hundred for the remainder of the decade.”
RITHOLTZ: Well, you don’t want to beat up on JPMorgan because they were on the other side. But I saw that $100 oil trade, “You’ll never see below a hundred.” What did it take, three days to break below a hundred?
WEINSTEIN: I actually think that one was the next day.
WEINSTEIN: Intraday — intraday. So — so you know, don’t say what’s not going to happen for 3,000 days or whatever and — and get it wrong the next day. There should be a Murphy’s law. That should be some — someone should name the — what that law is, where if you say it, you’re damning yourself. So — so I see way too much hubris, overconfidence, even in the face of giant losses. And it really — it kind of drives me crazy, because when I get asked, “Well, what does your crystal ball tell you?” I say, first of all, this is the wrong time. You know, it’s foggy. It should be —
WEINSTEIN: Like — like people get so used to the recency bias, what’s been true for the last month, what’s been true for the last three years.
RITHOLTZ: Extrapolating forever.
WEINSTEIN: Yeah. And we’re now in a world, maybe you’re still used to look at charts in the 1970s. And you know, we’re talking given where inflation is. And we should all be super humble because prediction is a very hard business. And I think the problem is that people who predict the loudest, you know, get the most attention and — and it’s — boy, it’s tough sledding right now. This market is so challenging.
RITHOLTZ: So — so there are two other post-pandemic issues I wanted to talk to you about. One is the meme stocks, GameStop, AMC, Robinhood. Tell us a little bit about what you were thinking with those. Were you trading those? Were you on either side of that trade? And were these just people bored at home, or what’s going on with this?
WEINSTEIN: I think there’s a lot — there’s a lot to the story. And you know, we’ve seen cases where somebody is too short and they didn’t realize being too short can create its own problem. And that could be the entire investment thesis is —
WEINSTEIN: — is i — if we push it up high enough, they have to be squeezed out. And then more — more becomes a supply-demand thing. But — but I also see that in 2021, right around the time that people are getting stimulus checks. And you know, the rise of — and you see NFT is taking off and crypto taking off even another leg higher, that there’s basically been a degradation in the importance of what something ought to be worth, what the value ought to be. And the price of something is much more determined by the physics of it, the push and the pull and — and not about economic models, more of a physical model.
And so so — you see the combination of people buying out of the money call options, whether it’s with their stimulus checks, or their net worth, and it working. And I saw, you know, in the heart of GameStop, so we were basically uninvolved, but I couldn’t resist, Barry. When like maybe Gamestop was 350, I was — I was actually using too fine a brush because I knew if I lost money, this would be embarrassing. So I was — I did it too small and waited for it to go to a level and didn’t get any kind of reasonable size.
But there was a day where like the GameStop was near the highs where a call for three weeks, a 100% out of the money. Like, GameStop is at 380. But the 800 call is that such an astronomical number that it costs like 150 points or something. And the vol literally broke people’s computers. They couldn’t — they couldn’t do P&L that night because it was a – the vol was on four-digit number. And so, I don’t think those investors are sophisticated on — on equity options.
But — but for many of them, it worked. And it was a — it was a — you know, it was an incredible moment. But it reminds me that that love of call options started last — the summer before SoftBank set up an entity to trade short-term call options on the tech names they liked. And the sellers of these options, the sellers of vol, whether it’s puts or calls, you know, basically blew up during COVID. Short vol funds that had done incredibly well when there was no vol, not surprisingly, blew up. And so you didn’t have the supply. You had the demand.
And so I see today, you know, NFT’s are kind of like an option. They have an asymmetric payout that people are in love with option like payouts. And — and as a consequence, vol is elevated even in benign times. Even last year, you know, Barry, even — you probably know way more about the VIX and the history of it than I do. But the VIX never really went below 20 last year for more than a day or two —
WEINSTEIN: — even in tranquil time. Go back five years earlier, 20 was like a red alert. You know, all — we’re in a — we’re in a correction or a bear market. But we’ve been between 20 and 40 since COVID. And I think these volatile times are going to stay with us.
RITHOLTZ: One last question before we get to our favorite question, which is you hired Stephanie Ruhle at Deutsche Bank and she tells me that you had a business as a New York City dog walker. So you have to tell us about hiring her and dog walker, what the hell is that?
WEINSTEIN: Barry, this is — this is low. You really gone low. I’m trying to go high. And you got to talk. OK, so I was 13, my parents wouldn’t let me watch TV and the Sony Watchman had come out and — black and white TV, about 2 by 2. And this is the 1980s. And so I thought if I had some money, I could buy one for $100. And so I used to walk dogs. I grew up in the Upper West Side, which was not the safe place it is today, back then in the late ‘80s. And I told my kids that in one instance, I had one of those extendable leashes. The dog ran ahead, ran into the elevator, elevator closed.
RITHOLTZ: Oh, God.
WEINSTEIN: And it started going up and I’m holding this big plastic thing that I can’t even get rid of. And it gets pulled from my hand and what seemed like way too many seconds, it’s up in the corner of the elevator door. And I’m thinking the dog is dead because the elevator went up, and came down, you know, bouncing around, but it was totally OK. So my dog walking career literally almost ended in one — in one cut. But I — when — yeah, when I was a kid, I did that.
But two years later, I was working as a summer intern and after school at Merrill Lynch. So Stephanie really got me with that one. She is basically one of the best things that ever happened to me at Deutsche Bank. I knew at Credit Suisse, she was so good as my salesperson that I would forego that benefit to have her at the bank and I helped bring her in.
RITHOLTZ: That’s really interesting. All right, let’s jump to our favorite questions that we ask all of our guests, starting with tell us what you’ve been streaming these days on your 2 by 2 Sony TV, man, whatever that was. I remember that was like a Dick Tracy watch almost. What are you watching on Netflix or Amazon Prime, or whatever?
WEINSTEIN: Sure. So I definitely watch my fair bit of TV, I’m doing with one eye. So I’m — you know, the other eye, I’m — at least when my kids are asleep, I’m definitely following the markets extra closest here. But I just finished the first six episodes of “Slow Horses” with Gary Oldman.
RITHOLTZ: I just started that this week. So good.
WEINSTEIN: I have to tell you there are so many lines of his that are just so quotable. And they’re just — they’re — I think the writing is brilliant. And — and the show, I give it an A minus, but his lines are an A plus. So that — that’s what I finished. I’m about to start Season 2 of Tehran. And my wife is from Tehran. And in Season 1, right in the heart of COVID, before Apple started streaming it, it was an Israeli show in Farsi and sometimes in Hebrew.
And so — so my COVID memory is my in-laws and my wife doing simultaneous translation for me because there were no English subtitles. I certainly couldn’t understand the Farsi. And so we — that was a really nice family activity. And I thought that was really a great show.
RITHOLTZ: Have you watched another Israeli show, Fauda?
WEINSTEIN: I have. I’ve actually met the cast.
WEINSTEIN: I think that’s very good. I’ve seen all those shows.
RITHOLTZ: I can’t watch it before you go to bed because you’re just like so stressed out. It’s the — it’s the most suspenseful exciting thing on TV.
WEINSTEIN: Yeah. Yeah.
RITHOLTZ: Really interesting. Tell us about some of your mentors who helped shape your career.
WEINSTEIN: So my start is because a woman who went to Hunter Elementary School, as a kid, put up an ad at Hunter and at Stuyvesant where I went, looking for someone to come in after school and help her arrange meetings, and put, you know, cards in — in folders and listen to — read stock research in my spare time. So that was Janine Crane. I’m still close with her to this day. She was a high net worth broker at Merrill and I worked there from ‘15 to ‘17.
And then the great David Delucia, from a poker who ran the junk bond desk at Goldman, the chess player who gave me my start at Goldman, was an incredible mentor to me. But you know, Barry, I think the importance of having someone that you can ask those questions to and why did this happen, and what do you think, and why did you sell this are so crucial when you’re young.
But when I got into credit derivatives, so 1998, January ‘98, I joined Deutsche, I’m still only 24 or 25 years old. And there’s no one to really learn about credit derivatives from. The thing is brand new and my — my two bosses actually left the bank six months after I started. So I really was alone in the wilderness during LTCM and Russia, and it was — it was a — it was an incredible experience. I was the most junior person on the desk, and the most senior because it became a group of one, and they let me in ‘99 hire some people, and the rest is history.
RITHOLTZ: Interesting. Let’s talk about books. What are some of your favorites and what are you reading right now?
WEINSTEIN: Well, so I’m going to read — I’m about to reread “Against the Gods” now that we had this awesome conversation about Peter Bernstein. I’m not that into reading the latest book. So I’ve gone back and read some books that I should have read before. So this last few months, I read “The Power Broker” by Caro.
WEINSTEIN: And just feeling a little bit interested in my own personal history and the trip to Yad Vashem quite recently, I reread “Man’s Search for Meaning” by Viktor Frankl. But a few years ago, a book that is kind of one of those books like a that — that people in our community read about different topics about whether it’s finance related or skill versus nurture in nature. There’s a book called “Range” by David Epstein —
WEINSTEIN: — that I thought had some really interesting chapters that I was unfamiliar with, whether it’s the spatial disaster I was a little familiar with, or violinists of the 18th century. It’s really a tour de force. You can get the basic ideas from it pretty quickly, but I quite enjoyed it.
RITHOLTZ: Really interesting. Well, you mentioned “Liar’s Poker” before. I just reread it for the first time in like 30 years, when I had Michael Lewis on recently. And it’s surprising how well it holds up over time. And there’s a book I’m going to recommend to you because I get a sense of your likes and dislikes. Have you ever read Gödel, Escher, Bach? It seems like that’s right up your alley.
WEINSTEIN: So I tried to read it as a college student and I — and I kept trying because I knew this will — this is a book that people who think, you know, that they can understand complicated things should read. And I loved parts of it. I need to — I need to give it another look because it’s been 30 years.
RITHOLTZ: I literally had the same experience. I fought through it in college and said I got to reread it. And it’s on my list to reread same — same exact things. Last two questions, what sort of advice would you give to a recent college grad who was interested in a career in finance?
WEINSTEIN: You know, I had people over the years, very frequently at Deutsche ask me, let’s say there was a summer intern that wanted to get a full-time job, or there’s a person in operations that wanted to get a trading job. And let’s say, at the end of the summer, or at the at the end of some period, how do I get a job on the trading desk? And I would sometimes — and we were pretty good about actually giving those opportunities. I’d say to the person who didn’t deserve it, let’s say, well, you know, we have this 7:30 meeting where all the traders go over their top positions and the sales force ask questions, “Why haven’t I seen you in those meetings?” “Oh, you know, I didn’t — my job starts at 8:00” or “I didn’t know I could go to those meetings,” you know.
And there’s decisions like that, like, should you go to that meeting? Or should you read the week’s research and ask a question, even if you work in operations, or even if you’re a summer intern. And a reasonable person on the other end, well, should look at that with loving eyes. And I feel like some people want it, but they don’t do the things they need to do to deserve it. And if it’s — if it’s about business, there’s almost nothing that would be too aggressive for someone to do like showing up at a meeting they weren’t invited to, that 50 people are in. It’s not a secret meeting. And I think young people who want to get ahead, who want to be doing something different need to do those things.
RITHOLTZ: And our final question, what do you know about the world of investing today you wish you knew back in 1998 when you were first getting started?
WEINSTEIN: As an investor me — this is an amazing question. As an investor that has to think about when is it cheap enough, what’s the discount one needs on a SPAC or on a closed-end fund, or the mispricing between a credit and an equity to put on a trade. I think that if I could go back, I would tell myself that my imagination for how crazy things could get is not enough.
You know, if you think about like if you took the government bond traders of pre ’08 and sent them to the moon, and left them there for years and brought them back, and tell them that interest rates, “Oh, you’re back. You know, here’s your, you know — here’s your newspaper. Interest rates are negative.” I think a lot of them would think like you’re playing a prank on them. We have Swiss rates negative to 50 years, so like not just a three-month bond, like 50, 30 years negative.
And so — so I think the market never will cease to surprise. And people who get trapped into recency bias, and this is the way things are and this is the way there’ll be, they’re not imaginative enough about what can happen. And it’s those extraordinary things that happen, where the — the real amazing payouts are, you know, maybe an example now of something that hasn’t worked, there probably some currency pegs that people assume are going to be there forever. And you know, you just have to be right one time in a hundred years, and you’re going to get paid back 500 times or 100 times.
And things — I think what has happened now with — with Ukraine and Russia, and COVID, and China, and inflation, I think we’re in a world where the impossible can be possible and we should think creatively about a range of outcomes instead of what’s the central — what’s the central theory.
RITHOLTZ: Thank you, Boaz, for being so generous with your time. We have been speaking with Boaz Weinstein, founder of Saba Capital. If you enjoy this conversation, well, be sure and check out any of the 400 previous ones we’ve done over the past eight years. You can find those at iTunes, Spotify, wherever you find your favorite podcasts.
We love your comments, feedback and suggestions. Write to us at — and it might be podcast @bloomberg.net Follow me on Twitter @ritholtz. Check out my daily reads @ritholtz.com. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Mohamad Rimawi is my audio engineer. Sean Russo is my head of Research. Paris Wald is our producer. Latika Valbrun is our project manager.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.