Phillip Goldstein and Bulldog Investors’ New Target

Phillip Goldstein and Andrew Dakos’ Bulldog Investors is literally a hungry hedge fund trying to create value by taking on corporate executives and closed-end fund managers. There aren’t a lot of hedge funds trying to go after closed-end funds. First, here is how this strategy works.

Closed-end funds occasionally trade at a significant discount to their Net Asset Value (NAV). It isn’t surprising to see discounts of 10-15%. Fund managers don’t have a lot of interest to close this discount. As a result some closed-end funds trade at a discount for an extended time period. Activist hedge funds buy 5-10% positions in these closed-end funds and try to force the funds’ operators to take action. They take larger stakes if they can hedge their NAV risk effectively.

The most important weapon in their arsenal is proxy contests. They can change the funds’ board and take control of the fund. Another action that they can take is to file shareholder proposals for contingent tender-offer plans. If these plans are accepted, the company could do a partial tender offer when the discount reaches a predetermined threshold. The main problem is that funds’ operators want to keep the fee income, so they usually don’t want to take any action that will reduce their assets (and fees). That’s why activist investors’ success ultimately depends on their ability to win a proxy contest.

Last Friday Phillip Goldstein disclosed a 10% stake in First Trust Strategic High Income Fund III (FHO). $FHO currently trades at an 11% discount to its NAV. We expect interest rates to edge up over the next year. So, investors might be better off if they hedge their risks in this case, which might not be easy.

We aren’t aware of any other funds monkeying Bulldog Investors so far. They probably welcome it though. When other activist investors build large positions to win a proxy contest, all activist investors benefit. It happened before, it may happen again.