Closed Ended Funds

The following was the answer to a, “which statement is true question” " The shares of closed-end funds are typically listed on a stock exchange, where they are bought and sold in the same way as corporate stock" I know they are traded on an exchange, but I also thought the whole purpose of calling it a “closed” fund versus an “open” fund, is because you cannot subscribe and redeem your shares at your will? If you cannot, how is it true that they “are bought and sold the same way as corporate stock” Thanks in advance

Basically they are traded like a stock. Every buyer needs a seller (like how corporate stocks are traded). Open ended funds you can directly redeem your equity from the fund. Closed ended you sell them on the market for whatever price it goes for.

Does that mean ETFs are indeed closed-end funds? And they are free from capital gains taxes?

Chicago_Bull Wrote: ------------------------------------------------------- > Does that mean ETFs are indeed closed-end funds? Almost surely not. ETF’s are structured as open-ended funds or unit investment trusts. Closed-ended funds have a fixed number of shares which is not possible with the redeem in kind feature of ETF’s that make them have prices near NAV’s. > And they are free from capital gains taxes? Nope - they try to avoid it but ETF’s can and do distribute capital gains just like regular mutual funds.

In Germany there’s a “trick” (which won’t survive), that dividends in ETFs are represented by a swap, ie the funds holds securities which do not pay dividends and swaps this performance to the index performance. Because of the swaps being derivatives you don’t have to pay taxes on the “dividend performance”. But that’s just a technical side remark for a special country…

This question is related to the original topic of closed ended funds. What liability does the issuer of closed ended fund carry if it does not need to redeem shares? Or is it that it does not allow redemption of shares as freely as open-ended funds but allow it ‘after’ a fixed tenure?

hi, I guess typically you have something like an investment “goal”. If you need 10 years investment horizon for your strategy to be successful (example: invest in life insurance policies which are typically not really liquid), you can redeem shares after 10 years, but if your investors want their money back, you’ve got a problem. So you won’t redeem early.

So does this mean that close-ended funds are redeemable? I am just confused by when the text says that the difference between close-ended and open-ended is the redemption feature of open-ended funds. Say, I am an issuer of a new close-ended fund offer with unit price of $1, and if 1000 investors buy these shares, then my kitty is $1000 which I invest (as per stated investment strategy) in stock market. Now, the investors can, if they want, liquidate their holding in secondary market.(not from me!) But, what happens with the $1000 which I have? Yes, the NAV is published and the performance of fund is tracked (which might cause the secondary market liquidity and demand-supply to price it accordingly). But, I as the issuer, do I have a liability to pay something to investors? (dividends?) Because, since there is no redemption happening at any time, the invested amount (+capital appreciation due to success of fund strategy) remains with me all the time. This might be basic stuff but I never had experience with close-ended funds… Please explain.

The investors will only give you money if they know when/if they get it back. You keep the 1000$ but you will have told something in your excellent pitch-book what happens with the money, and that they will receive $100000000s in 10years or whatever. Of course you have liability, but that doesn’t mean it has to be liquid or redeemable. You also cannot go to a company which is listed on a stocj exchange and claim your money back. quote: New shares are rarely issued after the fund is launched; shares are not normally redeemable for cash or securities until the fund liquidates

ok got it. So it is similar to equity … just somewhat worse because in stock the investor atleast gets shareholder rights and a possibility of dividends.