Boaz Weinstein Chases Hedge Fund Heights With Sculptor Bid

Boaz Weinstein made his name trading in esoteric corners of the credit markets. But his most audacious bet yet may be trying to catapult his hedge fund firm into the ranks of the industry’s largest players.

(Bloomberg) — Boaz Weinstein made his name trading in esoteric corners of the credit markets. But his most audacious bet yet may be trying to catapult his hedge fund firm into the ranks of the industry’s largest players.

To do that, the 50-year-old head of Saba Capital Management is attempting to buy his way to the top. He’s bidding — with a group of billionaire pals including Bill Ackman, Marc Lasry and Jeff Yass — for Sculptor Capital Management Inc., a beleaguered publicly traded money manager he aims to subsume into his $4 billion firm.  

Weinstein’s assets under management could balloon to more than $20 billion if he wins Sculptor, requiring only a $700 million investment backed by deep-pocketed friends. While Weinstein’s group made the highest bid, it was rejected for a lower one from Rithm Capital Corp. Sculptor, which said Rithm’s offer was more certain, won’t let Weinstein speak directly to investors or stockholders.

The sale of a struggling asset manager wouldn’t normally grab headlines or draw in hedge fund titans collectively worth more than $30 billion. But the protracted transaction — and a back story steeped in greed, ego and betrayal — has captivated the hedge fund set.

Even if Weinstein were to win the battle for Sculptor, the turnaround won’t be easy. 

Sculptor has been decaying for most of the last decade. Investors have pulled roughly $30 billion from its flagship fund since 2014, sparked by a bribery scandal in Africa. Dan Och, the firm’s founder, paid $2.2 million to the US Securities and Exchange Commission in 2016 to settle claims that he personally approved corrupt payments despite significant red flags. The firm paid more than $400 million to settle the case with the SEC and the US Department of Justice.

A public feud exploded a year later between Och and his former protégé, Jimmy Levin, over a succession plan, and Och eventually extended the fight to the younger man’s pay. 

Read More: Och-Ziff Drops Levin as CEO Pick, Highlighting Succession Woes

Och, 62, left the firm in 2019 but remains a large shareholder and foe of 40-year-old Levin. The firm’s performance has continued to lag behind competitors, and fundraising has languished. It had four consecutive quarters of outflows.

“Do we really think portfolio managers are focused on making money when there is a war raging in the hallways?” Andrew Beer, managing member of DBi, a New York-based investment firm, said in an interview. “It’s like everybody’s battling for control of the ship, but no one is thinking about the investors trapped in the hold.”

Negative Headlines

Och, a former Goldman Sachs Group Inc. trader, founded the firm as Och-Ziff Capital Management in 1994. By the end of 2013, it was managing more than $40 billion, making it one of the largest hedge funds in the world. 

Och eventually selected Levin – a one-time camp counselor and water-skiing instructor for the older man’s sons — as his successor and gave him a huge pay package, much of it in shares. As the stock tanked in the wake of the Africa scandal, Levin pushed for more money and for Och — who had agreed to leave the firm — to give up some future payments. A few days before Christmas in 2017, Och told investors he’d changed his mind about Levin taking the top job.

The firm changed its name to Sculptor the year Och left to distance itself from its founder. Och, along with former partners who are also major shareholders, sued Sculptor last year over what they argued was Levin’s “absurd” pay package. Och cited a “personal issue” from Levin’s past as the reason he didn’t elevate him to CEO five years before.

In August, Sculptor said in a filing that Och’s “purported concern for public stockholders is in stark contrast to his record when running the company.” The firm said he took home $3.3 billion since 2007 as Sculptor’s stock price tanked by 96%.

Enter Weinstein. 

Despite having only a medium-size hedge fund, Weinstein is well-known on Wall Street. He spent his early years at Deutsche Bank AG, where he was co-head of global credit trading, spinning out Saba as the 2008 financial crisis was unfolding. He counts several billionaire hedge fund managers as his investors. Initially, some in the industry speculated that Weinstein and his friends were doing Och’s bidding — billionaire buddies sticking together. 

Sculptor filings later hinted at Weinstein’s true goal. 

Like the chess master he is, Weinstein saw a way to exploit weak competition and build his empire. Saba’s main fund is slightly niche – short bonds, long volatility — and while he’s added some other strategies, growing assets is a slow game. 

So when Sculptor put itself on the block late last year, Weinstein assembled his all-star team and made a bid. In July, Sculptor picked Rithm — a firm that started out in mortgage servicing rights — which agreed to pay $11.15 a share, or $639 million. Sculptor rejected Weinstein’s higher bid, which now stands at $12.76. 

Read More: Sculptor Deal Thrusts Obscure REIT Into Wall Street Spotlight

The biggest difference — aside from the price — is that Rithm has pledged to retain the management team, while Weinstein would demote Levin from his post as sole CIO. Weinstein would add three senior people, including himself, to run investments in an Office of CIO, according to a Sculptor filing, which didn’t identify the other two.

Sculptor said it wants to keep the status quo because clients must approve the deal, and they chose to invest with Levin. It said in a filing that a number of clients had “raised concerns” about changes in the investment team without detailing the number of clients or the nature of their apprehension.

Sculptor’s hedge fund still manages about $8.5 billion. The firm, as of June 30, also ran a $4.2 billion real estate fund, a $5.8 billion credit fund and a $16.1 billion collateralized-loan-obligation business that Weinstein would sell. 

While the Saba founder signed a non-disclosure agreement barring him from speaking to investors or shareholders about his proposal, details have emerged from Sculptor regulatory filings as well as in conversations with people who say they spoke to him before he signed the NDA. 

Under Weinstein’s plan, Sculptor would be run as its own brand within Saba. With the current CIO in a lesser role, or even gone, Weinstein could use the extra money – Levin was paid $145 million in 2021 — to help retain strategy heads and others among its 100 investment professionals.  

Keeping personnel has been a struggle. It lost its global head of equity research to a rival firm late last year. Alexis Dufresne, a senior managing director at search firm Whitney Partners, said the number of resumes coming from Sculptor has spiked by 80% so far this year.

“The negative headlines tend to impact how employees feel about working at their firm,” she said.

Shareholder Vote

If Weinstein ultimately wins, he’d have to hold onto hedge-fund clients. To sweeten the deal, he would offer them a chance to invest in the management company with the same terms as his backers.

He’d also need to reassure Saba investors that the extra work wouldn’t distract him from managing their money.

Weinstein would also have to boost Sculptor’s performance to attract assets in a crowded strategy. The main fund has annualized at about 6% since 2018, and its returns more closely track the S&P 500 than other multi-strategy firms, according to investors. To counter that, Weinstein plans to add a “tail risk” component managed by Saba, and perhaps other strategies, too, according to a filing.

Sculptor said the shareholder vote will happen before year-end, but it hasn’t yet set a date. About 30% of the shareholders are current partners – most likely “Team Jimmy” – and 30% are former partners – “Team Dan.” Och and former CEO Rob Shafir already said they support the higher bid. 

That leaves 40% of firm’s shares up for grabs. Sculptor shares rose 1.6% to $11.68 at 10:06 a.m. in New York.

Based on Sculptor’s response so far, it’s likely that it will present shareholders with only Rithm’s offer. In that scenario, Weinstein’s best hope would be that proxy advisers Institutional Shareholder Services Inc. and Glass Lewis would weigh in, telling them to oppose the deal because a higher offer has been floated. 

Then Weinstein’s real work would begin. 

(Updates with share price in antepenultimate paragraph. An earlier version corrected job title in third paragraph after second chart.)

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