Legal Definitions - closed-end fund

A closed-end fund is a type of investment company that raises capital by issuing a fixed number of shares to the public through an initial public offering (IPO). Once these shares are issued, the fund does not continuously create new shares or redeem existing ones directly from investors. Instead, the shares of a closed-end fund trade on a stock exchange, much like individual company stocks. The market price of these shares is determined by supply and demand among investors and can fluctuate independently of the fund's net asset value (NAV), often trading at a premium or discount to the value of its underlying investments.

• Example 1: Investing in a Diversified Portfolio
  An individual investor wants to gain exposure to a diversified portfolio of high-yield corporate bonds without having to research and purchase each bond individually. They decide to invest in the Global Income Opportunities Fund, which is a closed-end fund listed on a major stock exchange. This fund initially issued 50 million shares to the public and does not issue any more. The investor purchases shares from another investor through their brokerage account, and the price they pay is determined by the market, which might be slightly below the actual value of the bonds held by the fund (a discount).

  Illustration: This demonstrates a closed-end fund because it issued a fixed number of shares that trade on an exchange between investors, rather than being bought directly from or sold back to the fund itself. The market price can also deviate from the fund's underlying asset value.

• Example 2: Accessing Specialized Assets
  A large university endowment seeks to invest in a portfolio of real estate properties, including commercial buildings and development projects, which are typically illiquid. They choose to invest in the Urban Development Trust, a closed-end fund specializing in such assets. The fund conducted a one-time offering to institutional investors years ago, and its shares now trade on a secondary market among these institutions. The endowment purchases a block of shares from another institution that is rebalancing its portfolio.

  Illustration: This highlights a closed-end fund's structure, where capital is raised through a limited offering, and shares are subsequently traded among investors. This structure is often favored for less liquid assets like real estate because the fund doesn't face constant redemption demands that would force it to sell assets at potentially unfavorable times.

• Example 3: Market Price vs. Asset Value
  During a period of economic uncertainty, the Emerging Markets Growth Fund, a closed-end fund focused on stocks in developing countries, experiences a significant drop in its share price on the stock exchange. While the underlying stocks in its portfolio have also declined, the fund's share price falls even further, trading at a 12% discount to its net asset value (NAV). This occurs because many investors are selling their shares, increasing the supply and pushing the market price down, even though the fund itself is not selling off its portfolio or redeeming shares.

  Illustration: This example clearly shows a key characteristic of closed-end funds: their market price is determined by investor supply and demand on an exchange and can trade at a premium or discount to their NAV, unlike open-end mutual funds where the share price is always the NAV.