Understanding Leverage
What is Leverage in a Closed-End Fund?
- Financial leverage is created whenever a closed-end fund common shareholder has
investment reward and risk exposure equivalent to more than 100% of their investment
capital.
- Closed-end funds create leverage by borrowing at short-term rates, then using that
money to invest in strategies or instruments providing longer-term returns.
- The intent is to create a positive difference between the longer-term return and
the short-term cost of borrowing. A positive difference between the two is available
to help fund common share distributions. If the difference is negative, or even
close to level, leverage may hurt the distributions paid to common shareholders.
