Art, Gretchen's article was on the mark, but she didn't talk about my greatest concern, the indirect interlinking of banks. Like, they may have $100 million in direct exposure to Russia. But, another half a billion bucks exposure to non-Russian banks who may be taken down by Russian banks. For example, did some shaky Asian and Latin American banks spread the risk of their own areas by investing in Russian derivatives? Or, will a major French or German bank go under because of Russia? Those countries do not have our openness and I worry that this may be a real domino theory.
The CEF story is kind of old. One of the reasons I like CEFs is the fact that when you are wrong, the shifting from discount to premium cushions the loss a bit. I have been doing investment co/Web paired trades on these premium funds for years in my maximum income account. It isn't really a comment on the co., but a method of squeezing out the premium.
First, I do not recommend a straight short sale. Something like Malaysia Fund could run from $3 5/8 to $10 in a few weeks. Unlikely, but possible, making the risk much greater than the return potential. It happened with Mexico, both of the last two crises.
However, paired trades make some sense. Here are some of my favorites from the recent past:
1. Long EWJ/Short Japan Equity (JEQ). This was a major winner in my Max Inc. portfolio, as the premium has dropped by 2/3.
2. Long EWM/short Malaysia Fund. Don't tell MoMo I'm short. He'll order hit squads. Fortunately, most of them are after Soros. With a 44 pct. premium, this is still the king of layups. BTW, this is not related to my long-suffering EWM position in my cap gains portfolio.
3. Long Jakarta Growth (JGF)/Short Indonesia Fund (IF). I have used this one several times. For some reason, even though JGF always manages money better than IF, IF always has a lower discount/higher premium. But, a 25 pct. premium, as silly as it looks, pales next to a 73 pct. premium. So, you buy the better managed fund, short the lesser, and get a nice cushion of nearly 50 pct.
4. Long Thai Capital (TC)/Short Thai Fund (TTF). Another weirdo. The better performing fund, on NAV, has a 27 1/2 pct. premium. The worst performing fund has a moderately full looking, IMHO,
93 pct. premium. Slam dunk.
Others I have had on and recently removed include Long Scudder Pacific Opportunity/Short Korea Fund. But KF has lost nearly all of its premium in the past 6 months, so I am out of it. Very nicely, thank you. Ditto for long EWS and short Singapore Fund. Da premium be extinct, and I be happy. -g- But I keep my eyes on them for further raids of the gullible's wallets.
5. One that recurs with regularity is a premium of 20-30 pct. on Templeton Emerging Markets Fund. That isn't available right now, but I've played it three times this decade against Temp's Developing Markets Fund, a load, open end fund that is a direct clone. I even got a help once from Mark Mobius and Sir John who mentioned in a CNBS interview that new investors shouldn't buy Emerging, which at the time had a 28 pct. premium, but buy Developing instead. I wanted to kiss the boob tube. -g-
It isn't important right now, but a few months back I was hollering on this thread about buying quality bond CEFs at discounts and shorting premium junk bond funds. That has worked like a charm, though with much less volatility than equity country funds. Some of the junkers had premiums in the 20 pct. area. Dumb! Now, not only have the premiums fallen to discounts in most cases, but the junks have underperformed quality on an NAV basis. That is a double whammy with very low risk, though you do have to pay out the dividend on the junk until you win, which is a pain in the patootie and the wallet. -g-
The writer made a very valid point. CEFs are very difficult to borrow. And, if you can borrow them, the brokers are reluctant to pay you a decent rebate. I get rebates of 25-50 pct. on my CEF borrowings, and I am a very good customer. I regularly get rebates of 70-85 pct. on my regular stock shorts. So you have to talk turkey with your broker and hope he can gobble up some shares for you to borrow.
BTW, there is a better way to play it when the opportunity arises, which it has currently. You can buy a deeply discounted CEF and short the NAV Web. The Web is easily borrowed and the rebates paid are high. Right now, that is the best game in town. Australia, Austria, Canada, Germany, Hong Kong, Mexico, Spain, and France offer a fairly diversified list of opportunities in Web arbitrage with CEFs.
MB
|
