Investors in Closed-End Funds Get ‘Scammed’


Investors have lost $1 billion investing in initial public offerings of closed-end mutual funds ? on average 22% of their money ? between January and August, 2011. Popular Wall Street Journal columnist Brett Arends suggests that the investors in these closed-end funds have been scammed.

Why does Arends say investors were “scammed”? Because the selling agents did not tell investors about some important facts, including the following:

  • Brokers skim 5% off the top of the purchase of an IPO of a fund resulting in an automatic unrealized loss for the investor right out of the shute.
  • Shares typically trade for LESS than their net asset value on the exchange ? another almost-automatic loss for the investor after the first lap. Why do they typically trade for less in the after market?Because Wall Street deliberately sells these IPOs at the peak of the market when enthusiasm runs high and the shares are poised for a fall.
  • Shares of IPOs of closed-end funds are “incredibly volatile,” meaning they are “a terrible buy in the IPO.”
  • Why are brokers selling them for (say) $20 per share when they are worth $19 and a nearly identical fund could be bought for $17? It’s the fees, of course, says Arends.
    • Arends singles out people whom Wall Street scammed into buying these funds as among the missing who should be protesting Wall Street:

      • BlackRock Resources & Commodity Strategy Trust – Down one-third or $260 million in six months
      • ING Emerging Markets High Dividend Equity Fund ? down 36% or $143 million in 5 months
      • Brookfield Global Listed Infrastructure Income Fund ? down 25% since August.

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