Closed-End Funds Dive in Down Markets

A byproduct of the financial crisis, as has been the case in past crises, is that closed-end funds come unglued. This has happened before, is happening now and, more importantly, will happen again.

The reason for this is the structure of the product. They have a fixed number of shares (save for the occasional secondary offering) and so the market price can deviate from the net asset value of the fund. This creates a discount or premium to the net asset value.

The strategy of buying a closed-end fund that has a wider discount than normal and selling it when the discount narrows or even swings to a premium is somewhat popular and valid, although it is not easy. ...