Closed-End Fund Basics
What is a Closed-End Fund?
A closed-end fund is a publicly traded investment company that invests in a variety
of securities, like stocks and bonds. The fund raises capital primarily through
an initial public offering (IPO). CEF shares
and the proceeds are invested according to the fund's investment objectives. "Closed"
refers to the fact that, once the capital is raised, there are typically no more
shares available from the fund sponsor and the issuance of new shares is closed
to investors.
After the IPO, every closed-end fund is listed on a national exchange, where its
shares are purchased and sold in transactions with other investors, not with the
sponsor company itself. When an investor wishes to purchase or sell shares of a
closed-end fund, the investor finds buyers or sellers on an exchange such as the
New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), or the
NASDAQ. The price is determined by market
demand and supply, not the fund's net asset value (NAV).
Although the outstanding shares of a closed-end fund remain relatively constant,
additional shares can be created through secondary offerings, rights offerings or
the issuance of shares for dividend reinvestment.
Click on the closed-end fund attributes below to view more details.
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Can access illiquid or institutional asset classes, in addition to retail asset
classes, because the portfolio manager does not need to handle redemptions
PM not forced to buy or sell at inopportune times as cash moves into or out of the
fund
No need to maintain cash reserves to meet redemptions
Yes
IPO: purchased from a syndicate member at fixed IPO price
Secondary: via any advisor or trading platform at market price plus transaction
fee
Sold in secondary market at market price, less transaction fee
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> What is a Closed-End Fund?
Closed-End Funds: What Are They?
Anne Kritzmire, Managing Director, Closed-End Fund & Structured Products Group, takes a quick look at Closed-End Funds.
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Closed-end funds are investments designed for income-conscious investors seeking
to meet a wide range of investment goals, including:
- The potential to meet current obligations with monthly or quarterly cash flow;
- The potential to achieve attractive, long-term total returns;
- The opportunity to realize greater income portfolio diversification.
Closed-end fund shares also carry risks investors should understand:
- Closed-end funds trade on exchanges at prices that may be more or less than their
NAVs.
- There is no guarantee that an investor can sell shares at a price greater than or
equal to the purchase price.
- Closed-end funds often use leverage, which increases a fund’s risk or volatility.
