Basic Finance

The article “How to Invest in a Closed-End Fund” published by Fox business seeks to address the some of the factors that can lead to a successful closed-end funds investment. The research problem being addressed is based on the assumptions that an investor decides to go with closed-end funds. Pointed out are some of the things to review (“How to Invest in a Closed-End Fund”, 2016).

It is clear from the article that it is not a simple issue to trade with the closed-end fund and that is why the author advises that an investor runs a thorough background check on other options that have similar investment goals before diving into closed-end funds. The author states that one of the reviews that need to be considered is the expenses.  A conflict emerges when he concentrates much on the manager side rather than on the actual matter at hand; the shares.  The manager being a skilled person in this field should know better considering his duration in the fund management. The crucial thing to do should be to consider trading the shares through a discount brokerage in order to hold the costs down.

There is one very logical reason why closed-end funds trade at a discount to their Net asset Value. This is because there is no structural feature that is similar to an ETF where you can arbitrage if it does trade at a discount or redeems and get the underlying assets. That does not exist in closed-end funds and because of that, there is a risk that can occur when it trades at a discount which means that an investor should be compensated for that risk and they should be the one willing to pay a discount for that security. This is another influence that the author doesn’t mention when he talks about the discount.

Overall, this is a good concept on how to invest in closed-end funds, however, the author fails to go into details about the kind of investor suitable for this kind of investment, there doesn’t appear to be any kind of concrete guideline on how to carry out this. In other words, this sounds great for a paper but does not translate in everyday life.

From my point of view, I think closed-end funds are more suitable for the investors who are relatively astute to the financial market because there are certain risks. An investor who is probably not best suited is the one who is not going to look under the hood and see actually what is under the closed closed-end funds, is there leverage involved, where is the historical discount etc. So it really needs someone who is going to scrub the web and see if they are going to get more detailed information.

 

 

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