Partly this was because our strategies continued to value-add, making up for losses in our inventory. Partly it was because we aren't completely "black box" in our approach. Our trading team got very little sleep during this time and tweaked our strategies to reflect the day-to-day new realities of the summer.

Did closed-end funds as a class recover? Are they no longer undervalued?

I would say they are still quite undervalued. One basket of 188 CEFs we trade frequently -- an equal number of bond and equity funds -- had an average discount of 3.2% at the end of 2006 and now has an average discount of 9.2%. The average discount from July 1 to Aug. 14 widened from 5.1% to 9.3%, then "crashed" to 12.8% during the two bad days. Our CEF basket recovered following the first Fed intervention, with the average discount narrowing over 600 basis points to 6.5% on Sept. 6, but since then it has widened back to its Aug. 14 level.

Bond funds seem even more undervalued than equity funds. In our database, bond funds have widened 5.5% since July 1, vs. 3.2% for equities. The worst culprits are the preferreds like the Nuveen Multi-Strategy Income and Growth Fund ( JPC) and the resets such as the Eaton Vance Floating-Rate Income Trust ( EFT), but, in general, bond funds seem to be compelling buys on a discount basis, while simultaneously being vulnerable to tax-loss selling. Determining whether a given fund is a compelling buy or a tax-loss candidate that should be avoided is a tricky job, and we don't have a simple algorithm to do it.

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