Boaz Weinstein’s $1.3bn flagship fund stung by stock rally

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Hedge fund manager Boaz Weinstein’s flagship investment strategy has fallen sharply this year amid a broad market rally after he predicted late last year that global stocks were heading for a bear market.

The $1.3bn fund — which bets long and short in equity and credit markets — run by Weinstein’s New York-based Saba Capital has lost 7.7 per cent so far in 2023, according to a letter to investors seen by the Financial Times.

A separate fund, which has assets of almost $1bn and is designed to protect against “periods of market stress and dislocation”, has fallen 8.1 per cent. Saba Capital declined to comment.

Weinstein, whose company was one of the world’s best-performing hedge funds in the market turmoil of 2020, told the FT last year that high inflation would lead to “doldrum” markets and that he was “very pessimistic”.

“There’s no reason that this difficult [economic] period will only last two to three quarters [and] . . . no reason to think we’ll have a soft landing or a shallow recession,” he said in October.

He also said he was holding credit default swaps on companies likely to be placed under financial stress by a recession. These instruments provide protection if a company defaults, allowing the holder to sell them for a profit if investors believe it is increasingly likely that this transpires.

However, global markets have confounded such bearish predictions with a powerful equity rally as the global cycle of rising interest rates nears its peak.

Wall Street’s S&P 500 is up 18 per cent in 2023, while European and Japanese stocks have also racked up strong gains.

The rise has come as the resilience of big economies — particularly the US — in the face of higher borrowing costs fuels investors’ hopes of a “soft landing”, where central banks succeed in taming inflation without sparking a painful downturn.

Saba’s losses follow a much stronger performance in recent years. Its flagship fund tends to perform well in volatile or falling markets. It gained 73 per cent during the Covid-19 pandemic turmoil of 2020, lost 1 per cent in 2021 as markets rebounded and gained 22 per cent last year as rising interest rates hammered global stocks and bonds. The firm manages $4.4bn of assets in total.

Many hedge funds have been wrongfooted by markets this year. Merger arbitrage hedge funds have performed poorly as regulators have increasingly intervened to block deals, while macro hedge funds were stung by sharp swings in bond markets after the failure of Silicon Valley Bank in March.

“The problem this year is that the damned markets haven’t behaved as one might expect,” said Andrew Beer, co-founder of Dynamic Beta Investments.

“Rates have gone up yet growth stocks have destroyed value stocks, the yield curve has inverted but there is no recession, and there have been 500 points of rate hikes and nothing big has broken,” he added.