What are Closed End Funds?

Published by Thomas Herold in Economics, Investments, Trading

'Closed End Funds' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Closed end funds refer to those investment companies which are publicly traded and regulated by the SEC Securities and Exchange Commission. They are similar to mutual funds in some ways. Both represent investment funds which are pooled and overseen by a portfolio manager. The closed end varieties raise fixed amounts of capital. They do this in IPO initial public offerings. Such funds will then be established and structured, listed on a stock exchange, and finally then traded, bought, and sold as a stock is on one of the exchanges.

Other names for these closed end funds are closed end mutual funds or closed end investments. These funds have things in common with the open end funds as well as characteristics which are unique to them and which set them apart from such ETF exchange traded funds and mutual funds.

Closed end funds are only able to raise their capital in a single instance by utilizing an IPO and issuing a set quantity of shares. Investors in this closed end operation will then buy the shares like stock. They do have an important difference from typical stocks. Their shares are actually a certain interest within a given portfolio of securities that an investment advisor will actively manage. Usually they focus on a chosen and particular sector, geographic area and market, or industry.

Stock prices of these closed end funds vary with the market supply and demand forces. They also fluctuate based on the changes in the values of the underlying assets or securities which the fund contains. While there are many of these particular closed end funds, among the biggest in the fund universe is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund.

There are a number of important characteristics which the closed end and open end funds share in common. Management teams run their investment portfolios in the two cases. The two types similarly assess and collect their annual expense ratio. They also may both provide capital gains and income distributions to their stakeholders.

The differences between the two types of funds in this universe are important. While open ended funds have their own particulars of trading, the closed end funds will trade exactly like stocks on their respective exchanges. The open ended variants receive a value and pricing only one time per day at the end of trading. The closed end variety will be both priced and traded repeatedly all through the market trading days. The closed end funds need a broker service to sell or buy them. In marked contrast to this, investors in the open ended funds many times may buy and sell their relevant shares directly with the provider of the fund.

A closed end fund also has some unique characteristics in the ways that its shares become priced. There is a difference between the funds NAV net asset value and the trading price. The NAV will be figured up at regular intervals throughout the day by computers. The actual price for which they trade on exchanges becomes set only by demand and supply forces interacting on the exchange. The end-result of this unique set of features is that the closed end fund might actually trade at a discount or premium to the net asset value.

This might occur for several different reasons. Those funds which are closed ended might be concentrating on a sector in the markets which happens to be more popular, such as biotechnology or alternative energy sources and technology. This would allow sufficient interest from investors to bid up the price of the fund to a premium over its actual NAV. When such funds are run by a stock picker with a successful track record, they can trade for a premium. At the same time, when investor interest is insufficient or there is a negative profile of risk and return perceived on the fund, it will often trade for a discount to net asset value.

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The term 'Closed End Funds' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.