Can you explain about CEFs, and the arb strategy that is exploited?
Good morning Terry-
CEFs are Closed End Funds; they trade intraday on exchanges, just like equities, but they also post an EOD NAV like mutual funds. Because there is a price, as well as an NAV, there can be situations where the price of the CEF is lower than the NAV, therefore creating an arbitrage opportunity.
Using the Mexico Fund (symbol MXF on NYSE) as an example, the price is at a 13.222% discount, compared to the NAV based on Friday's closing values. An investment firm that is looking to take advantage of this 'pricing mismatch' would buy a large position in the CEF, and then short a corresponding proportion of the actual holdings of the fund (the fund's holdings can be found in their SEC reports). So in essence, they are squeezing the discount out ('pulling' the CEF higher in price, while 'pushing' the NAV lower). This could take a sizeable position in order to work, but I have seen it done. You can find CEFs that are trading at more than a 20% discount too, offering an even larger arb opp.
I heard someone once describe arbitrage as "standing in front of a steam roller, while picking up nickels". I believe that's true. Speaking of that, I want to respond to your other post to me regarding your thoughts on hedge funds, but that may take some time. I am only working two days this week, then I'm off on a 4-day motorcycle trip...looking forward to some R&R (though I cam back with a badly bruised lung from last year's trip, so I'm not sure if this is the best place for R&R. lol!).
Have a good day.
-Keivn |
