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%.

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