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Cracking the closed-end fund market has been tough this year, but one code-breaker-turned-fund-manager has found the key.

Based in Annapolis, Md., Richard Shaker manages $85 million in assets, employing various closed-end fund trading strategies, most notably discount mean reversion. Prior to starting

Shaker Financial Services

, Dr. Shaker was deciphering enemy codes as chief of mathematical research for the National Security Agency.

Dr. Shaker's composite managed accounts are up 1.7% vs. a decline of 5.6% for the

S&P 500

year to date. He finished up 13.7% in 2007, compared to 5.5% for the index.

asked Dr. Shaker about his favorite CEFs, whether he expects discounts to narrow or widen and what he is hearing on the activist front.

Q: The last year has been hectic in the closed-end fund market due to Fed actions and failed auctions. How have discounts been affected? Where are they now?

A: We generally compare a CEF's current discount to a short-term average of its recent history. However, during the past nine months, this strategy has been complicated by three dramatic widenings of average discount, each of which was followed by a retracement. The first widening, from 4% to 13%, began in mid-April of last year and culminated with the first Fed intervention on August 16.

The average narrowed back to 7% in August, but then, under tax-loss selling pressure, went to 11% near year's end. The CEF version of the "January effect" resulted in a narrowing back to 5% in early February. A third widening took place in late winter during the failure of ARP (Auction Rate Preferreds) auctions, with the average discount going back to double digits briefly on March 17. But as of today (May 23), the average is back to 6%.

Q: How do you adjust your strategies while all this is going on?

A: When discounts are widening, we find it safer to be in funds with discounts that are already quite wide. In March, when fear was rampant, we found comfort owning

New Ireland Fund

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Old Mutual/Claymore Long Short

( OLA) at discounts approaching 15%. Additionally, we were able to park money in certain CEFs which historically both hold to tighter discount ranges and tend not to participate in general CEF moves, such as

Adams Express

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. We also picked up some funds with discounts that widened significantly more than the others, notably

Calamos Convertible and High Income

(CHY) - Get Calamos Convertible and High Income Fund Report

, which went from a 5% premium to a 13% discount in less than two months.

After discounts stabilize and begin to narrow, we find that a good way to evaluate a CEF's attractiveness is to compare its discount to what it was before the widening began. We combine this comparison with our more traditional short-term indicators in making our trading decisions.

So, for example, in January, besides using our typical short-term indicators, we compared a CEF's discount to what it was in the last period of stability prior to tax loss widening. We still find that comparison useful, but currently we also compare a CEF to its average discount prior to the ARP scare. A good example of this is

Eaton Vance Limited Duration Income

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. We accumulated it at an 11% discount in late March and early April even though the discount had been as wide as 15% in the middle of March, because it had been much narrower in February.

Q: What if all the discounts in one sector widen? Do you pile in?

A: Yes and no. We try to identify sector moves as well, and when making our buy-sell decision, we consider not only the attractiveness of the discount of an individual CEF but also its relative attractiveness within its sector.

Occasionally, we are willing to overbuy an especially attractive sector. For example, the senior loan group had terrible NAV performance early in 2008, but even after NAV's stabilized, discounts continued to tumble. We saw this as a great buying opportunity and accumulated

First Trust / Four Corners

( FCM) at

LMP Corporate

(TLI) - Get Western Asset Corporate Loan Fund Inc. Report

at attractive discounts. Recently discounts in this sector narrowed considerably.

We try not to overdo owning any particular sector, and not just in order to remain diversified. Among the many factors that influence the movement of CEF discounts, one is a tendency for funds to behave like others in their sectors, so we believe owning the funds within a sector that are most attractively valued on a short- or intermediate-term basis is a winning strategy. REIT fund discounts, for example, have narrowed dramatically, so that none meet our strictest buy criteria, but we have been successful trading a few, such as

Nuveen Real Estate Income

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, that narrowed less than the others.

Q: What are you doing now?

A: Staying with the REIT sector, we've recently traded


( SRO), which tends to track closely its sister fund,


( SRQ). A primary consideration in this purchase was a substantial narrowing in SRQ, so SRO was a laggard play based on the historical relationship.

In the emerging market space, there has been a dramatic narrowing in Asian funds. We continue to hold some we might otherwise have sold, but we have also taken a small position in

Thai Fund


, which historically trades at a premium but recently is trading at a discount.

We believe

Emerging Markets Telecommunications


is attractively priced and it has become one of our larger holdings, along with

Mexico Equity Income

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We continued to accumulate a small position in

Latin Discovery


despite its negative short-term indicators, because its discount is favorable relative to pre-tax-loss-selling levels and because its discount has narrowed less than

Latin America Equity



Q: You haven't mention activism. Is it quiet on the activist front?

A: Not at all. On consecutive days this May,

Claymore / Raymond James

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announced it would convert to an ETF and

Castle Convertible

( CVF) directors voted to open-end the fund.

The first had been targeted by activists. The second, however, was a surprise. The windfall profits that resulted from these actions are icing on the cake. The discounts remaining in these funds are, of course, much lower than they were, but they still afford the opportunity for enhanced returns to investors who buy them now and hold them until the reorganization is completed.

Before joining, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.