Closed End Complexity

On Tuesday I sat in on a presentation about the Absolute CEF Opportunities Fund (ACEFX). I've known about closed end funds (CEFs) since the late 80's reading about them regularly in Barron's. Barron's still gives them some attention. It's a quirky space. There are only 455 CEFs. The quirk is that unlike mutual funds or ETFs, the number of shares is fixed (for the most part) so the market price can drift above or below the net asset value (NAV) of the fund's holdings. 

Back then, Thomas Herzfeld was the axe in the space and these days I think Boaz Weinstein from Saba Capital would have that title but there are a few other activists too and other types of managers including ACEFX. The managers of ACEFX have only been on the fund for a year and they inherited a dreadful track record so I have no idea whether the fund is a good one or not but the presentation was interesting.

Individual investors, they said, tend to buy CEFs for the yield. CEFs use leverage which magnifies the yield as well as the size of the drawdowns. Institutional investors are trying to capture a bunch of other types of trade beyond just sitting on them for the yield.

ACEFX listed out the various trades it looks for under its hood as follows.

Event Driven

• Rights offering-often leads to tradeable price movement
• Liquidity at NAV-occasionally funds close or offer to buy shares back at NAV
• Fund mergers-this would typically occur within the same fund family
• Large dividend changes-this too can lead to tradeable price movement

Relative Value

• Deep value names with a catalyst
• Volatile premium/discount valuations
• Sector funds (e.g., healthcare, master limited partnerships (“MLPs”), real estate investment trusts (“REITs”)
• CEFs trading at premiums, both long and short
• Relative dividend yield discounts versus peers
• Tax loss selling and the “January Effect” 

I thought the first CEF was Adams Express (ADX) which started in 1929 and has since changed its name to Adams Diversified Equity Fund. It turns out CEFs have been around since the 1800's. I really get a kick out the fact that something presumably so basic has evolved into a series of very complex strategies. 

I don't have much to add here, it's just a fun part of the market to look at. 

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