A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The closed end fund is structured, listed and traded like a stock, usually on a major stock exchange.
Although some novice investors confuse closed-end funds with the more traditional open-end mutual funds, there are differences. Some of these include:
- Once it begins operating, a closed-end fund is closed to new capital;
- Closed-end fund shares trade on a stock exchange rather than being redeemed directly by the fund;
- Shares of a closed-end fund can be purchased or sold throughout the day as opposed to an open-end fund that can be traded only at the closing price at the end of the market day;
- Closed-end funds often sell at a premium or discount to net asset value, but an open-end fund sells at its net asset value; and
- Closed-end funds can own a greater amount of illiquid investments than can open-end funds.
Brokerage firms when recommending mutual funds to their customers will sometimes blur the differences between closed-end and open-end funds. Sometimes brokerage firms omit disclosing the risks associated with closed-end funds, particularly those purchased in the IPO.
These risks are apparent in a startling statistic: For the first eight months of 2011, investors have lost $1 billion – or 22% of their money on average – in closed-end funds purchased in the IPO.
Brett Arends of the Wall Street Journal suggests that closed-end fund investors have been scammed. Below are some of the important facts that brokerage firms have neglected to inform investors:
- The first 5% of the investors’ money in a closed-end IPO goes straight into the pocket of the people selling the fund;
- Closed-end shares usually trade for less than their net asset value because brokerage firms deliberately sell these IPOs at the market’s peak when enthusiasm runs high and the shares are poised to fall; and
- Shares of closed-end IPOs are incredibly volatile.
Despite the dismal track record, why are investors still being steered by their brokers to closed-end funds, particularly those in an IPO? It’s the fees, of course.
If you have investment losses or problems involving closed end funds, call the lawyers at Page Perry for experienced representation at (404) 567-4400 or (877) 673-0047 (toll free).