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Closed-End Funds Still Scary-Cheap

Is the recovery in closed-end funds a trick or a treat?

This summer's credit crisis severely spooked closed-end fund investors, frightening many right out of their holdings and into the relative safety of Treasury bonds. Discounts were stretched during the selling storm, as fund managers unceasingly unloaded their CEFs until the Federal Reserve saved the day with a surprise 50 basis point reduction of its discount rate.

The market has steadied since then, but checked in with Dr. Richard Shaker, portfolio manager of Shaker Financial Services and former chief of mathematical research for the National Security Agency, to see if the rebound is for real and not merely a Halloween prank.

Based in Annapolis, Md., Shaker manages $77 million in assets, employing various closed-end fund trading strategies, most notably discount mean reversion. Shaker's composite managed accounts were up 17% for the year (as of Oct. 26), compared to the S&P 500, which returned just below 10%. Quant funds had a terrible August. You use a quantitative approach in trading closed-end funds. Were you affected?

Shaker: Mid-July through mid-August was hard. Although the classical quant funds like Goldman and Renaissance had severe difficulties the week of Aug. 6, our darkest days were Aug. 15 and 16, when there was massive liquidation of CEFs, many opening down 10%. CEFs as a class significantly underperformed the market during this period, yet somehow we came through it with performance no worse than all the relevant market indices during July and August.

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