Hedge-fund firms Saba Capital Management LP and Pine RiverCapital Management are piling into closed-end debt funds with shareprices that plunged below the value of their assets by the mostsince the credit crisis.

Saba, the $3.9 billion manager run by Boaz Weinstein, hasamassed at least $847.3 million in the publicly traded funds afterit started buying them last year, moving into an area traditionallydominated by individual investors, regulatory filings show. PineRiver purchased $159.6 million of shares that on average fell asmuch as 9.1 percent below their holdings in December, the biggestgap since 2009 as measured by Thomas J. Herzfeld Advisors Inc.

Hedge-fund managers are seeking an edge in a market where theriskiest corporate debt is typically yielding 6.06 percent, 3percentage points less the average of the past decade. They'restepping into funds run by BlackRock Inc. and Pacific InvestmentManagement Co. (Pimco) after retirees and wealthy individuals fledlast year in the face of a Federal Reserve pullback from unprecedented stimulus.

“A tremendous amount of money has been invested bynon-traditional institutional investors, including hedge funds,”said Cecilia Gondor, executive vice president at Herzfeld Advisorsin Miami Beach, Florida. “Retail investors are still nervous aboutinvesting in interest-rate-sensitive securities.”

Individuals accelerated their sales of closed-end funds in Juneafter then-Fed Chairman Ben S. Bernanke laid out a plan by whichthe central bank would reduce its monthly asset purchases.Dollar-denominated junk bonds plunged 2.6 percent that month, andinvestment-grade notes dropped 2.8 percent, according to Bank ofAmerica Merrill Lynch index data.

The biggest closed-end credit funds outstripped even thoselosses. Pimco's $2.77 billion Dynamic Credit Income fund sunk 3.7percent in June, and DoubleLine Capital LP's Income Solutions funddropped 6.56 percent, according to data compiled by Bloomberg thatincludes reinvested dividends.

While speculative-grade bonds subsequently rebounded, gaining 5.8percent in the following six months, closed-end funds have laggedbehind.

'Beaten Up'

Individual investors, concerned that funds that use leverage arevulnerable to bigger losses as bond yields rise, continued to selltheir shares into year-end, according to Sangeeta Marfatia, astrategist at UBS Securities LLC in New York. They also were drivenby efforts to lower taxes by locking in losses at year-end, shesaid.

“Closed-end funds got beaten up pretty bad,” Marfatia said in atelephone interview. Even with the drop, she doesn't necessarilyview the discount in the shares as a buying opportunity.“Closed-end funds use leverage, and interest rates are rising,” shesaid.

Shares of the investment vehicles dropped as much as 26.2percent below the average value of their holdings in the depths ofthe financial crisis in October 2008 as investors fled strategiesthat use borrowed money, Herzfeld Advisors data show. They usuallytrade at some discount to the value of the underlying assets.

Hedge-fund firms that typically seek to exploit inefficienciesin the debt markets are now swooping in as yields on 10-yearTreasuries retreat to 2.67 percent from 3.03 percent at year-end,and as yields on riskier debt return to almost record-lowlevels.

The magnitude of Saba's recent purchases of the fund shares isunprecedented, according to Warren Antler, who specializes inanalyzing closed-end funds at AST Fund Solutions LLC in Lyndhurst,New Jersey.

“You've got a big hedge fund buying into this space,” he said ina telephone interview. “This showed up in the last quarter.”

Saba, which former Deutsche Bank AG credit-trading co-headWeinstein started in 2009 to trade on price discrepancies betweensecurities, last year purchased $75.7 million of shares in Pimco'sDynamic Credit Income Fund to become the biggest single holder ofthe fund's securities, Bloomberg data show.

The hedge fund bought $78.5 million of shares in the BlackRockCorporate High Yield Fund VI to become its second-biggest owner.The firm now owns $41.5 million of shares in BlackRock's CreditAllocation Income Trust, becoming its fourth biggest owner, thedata show.

Pine River, founded in 2002 to pursue opportunities inrelative-value trading globally, bought almost 1.1 million sharesof Pimco's Dynamic Credit Income Fund, valued yesterday at about$24.4 million, in the three months ended Dec. 31, filings show. Itbought 1.1 million shares in BlackRock's Corporate High Yield fundand 1.4 million of DoubleLine Income Solutions Fund shares in theperiod, the data show.

The Pimco fund rose 0.8 percent today to $23.07 as of 12:58 p.m.in New York, the biggest increase this year. BlackRock's fundclimbed 0.2 percent to $12.46, the highest since Dec. 26, whileDoubleLine's added 1 percent to $21.38, the highest sinceOctober.

While Pine River owned some closed-end fund shares at the end of2012, more than 70 percent of its purchases were made last year,filings show.

Exploiting Gaps

Jonathan Gasthalter, a spokesman for Saba, and Patrick Clifford,a spokesman for Pine River, declined to comment.

Relative-value hedge funds make both bullish and bearish wagersto profit from price discrepancies between securities. The fundsare wagering that the shares have plunged too far below the valueof debt that's rallied in the face of weaker-than-expected economicdata, which has lowered expectations for how much Treasury yieldswill rise this year.

Pimco's Dynamic Credit Income Fund has gained 3.2 percent thisyear including reinvested dividends, while BlackRock's CorporateHigh Yield fund has returned 2.8 percent, Bloomberg data show.

“We've seen a bounce back,” UBS's Marfatia said. “People areattracted to the value proposition, but they also sold off so muchthat they had to step in and buy some of this.”

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