Peter,
You asked about my experience. I've been investing most of my assets in CEFs for about a decade. In the early days, I invested only on the long side, and simply got out when my positions went to big premiums, as some did, incl TTF and GER. I first tried an arbitrage short with GER (short) and what was then Future Germany (later became Central European), in about 1992. At the time, there was a 20% spread between the two funds, whose portfolios were virtually identical and managed by the same manager. That trade worked out well. I again shorted during the premium runup in late 93 and early 94. Late in 94, I shorted the Mexican closed ends aggressively, and hedged with an open end Mexico fund. That too worked out very well, as I shorted at premiums around 50%, and covered when the premiums disappeared, my recollection is about 1 year later. Through all of this, I have observed that no closed end fund has ever maintained a premium over 25% for more than a year or so, with one exception - Korea Fund in the late 80s. However, there were unique reasons for that, which no longer exist. In the late 80s, there were essentially no ways that a U.S. based individual investor could invest in Korea, except by using KF. Obviously that is no longer the case. In my opinion, the only real risks in a hedged play based on a very overpriced CEF are (1) your stock gets called in; and (2) you get the hedge wrong. By this, I mean that the NAV of your long side position significantly underperforms the short side NAV. Generally, I think that these are risks worth taking.
With respect to TTF, while I am still massively short, I recognize that this is one fund that actually deserves some premium. Most of its holdings are local shares, which are valued at significantly lower amounts than the foreign shares that most foreign investors have to buy. Nevertheless, TTF is still significantly overpriced. My goal is to unwind the hedge when TTFs premium drops to somewhere between 20 and 40%, depending on how aggressive I decide to be. So far, the TTF short and hedge - with Thai Euro and TVF has been fairly profitable - but it could have been more so if I had decided on a larger hedge on the long side (on the long side, I hedge based on NAV if I am neutral to negative, and I hedge based on market price of the short if I am bullish on the country I am shorting). In this case, though I was fairly bullish on Thailand, the size of my long hedge has only been a little bit larger than the NAV on TTF, when, given my bulishness, I should have taken a long position that was close in market value to the size of the TTF short.
I too started shorting TTF when premiums were in 40 - 50% range. However, when premiums recently ran up well over 100%, that is when I massively increased my positions. I shorted some at premiums over 160%, and hedged that with TVF. At the time, TTF was in the upper 8s and TVF was at 7 and 1/4, so that trade has so far been pretty profitable.
I've been even more aggressive with the Malaysia hedge, because the premium on MF is far more irrational than the premium on TTF. As far as I can tell, there is no significant distinction in Malaysia betweeen foregin and domestic shares. Also the existence of the Malaysia WEBS makes the MF premium just totally absurd.
So, I'm confident that the MF premium will eventually go to zero, or back to a discount. Of course, I don't know how long this will take, but I'd be surprised if premiums over 10% persisted a year from now.
As for TTF, my adivice would be to maintain the position until premiums drop below 40%. Also, make sure that the size of your long side hedge is correct. If SSG has lots of cash, then you need lots more of it to hedge, obviously.
As for your TTF/TC hedge. You say that you're waiting until the spread is 15% or less. I'm not sure whether this is wise or not. As noted above, I think TTF is worth more than NAV, because of its "local" shares. Does TC also have as many local shares? I don't know, but you should find out. If it doesn't, then TC isn't worth nearly as much as TTF. Also I believe TCs expense are higher than TTF, so that factor also supports a lower price, relative to NAV, for TC.
Sorry if some of this is rambling, but I hope you find these thoughts helpful.
Alan |
