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High Yield Closed End Fund Strategy

 

OBJECTIVE

 

To purchase closed end funds with strong distribution rates at a discount, resulting in returns that exceed yields of individual underlying securities while spreading risk.

 

ABOUT CLOSED END FUNDS

 

A Closed End Fund is a type of investment company that pools money from investors to buy securities. They are similar to mutual funds in that they professionally manage portfolios of stocks, bonds, or other investments (including illiquid securities).  Unlike mutual funds, which continuously sell newly issued shares and redeem outstanding shares, most closed-end funds offer a fixed number of shares in an initial public offering (IPO) that are then traded on an exchange.

Because they are closed, investors must buy and sell their shares, typically on an exchange, to enter and leave the fund. This can be an advantage over Open End Funds because the managers need not sell bonds to meet redemptions when such selling could occur under poor market conditions. However, the buying and selling of shares by investors may affect the Close End Fund’s intraday price by either driving it up or pushing it down. Additionally, because Closed End Funds do not need to maintain the same level of liquidity as Open Funds typically do, they often have greater flexibility to use leverage and invest in illiquid securities. This can lead to greater volatility and risk.

Because closed-end funds trade like stocks, the supply and demand for the shares determines their market price. The share price of closed end funds trades independently from the Net Asset Value (“NAV”) of the securities in the fund. Consequently, depending on the demand for the funds the share price can trade at a premium or discount to the NAV. Whereas with an Open End Fund, the NAV is calculated at the end of the day and represents the price where the shares can be bought or sold (less any fees or sales charges).

 

 

 

 

 

 

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