Understanding Closed-End Funds

CEF

1. 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) 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.

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

Next: Who invests in Closed-End Funds?

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.

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