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Arbitrage closed-end funds and ETFs?
Old 07-06-2005, 01:21 PM   #1
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Arbitrage closed-end funds and ETFs?

Hi all,

I was wondering if anyone had looked into this investment approach? Closed-End funds are similar to ETFs in that they can trade "whole baskets" of stocks and trade on an exchange just like a stock and have a NAV.

A lot of times they either trade at a discount or a premium, but as I understand it, they generally revert to a mean.

So, my thinking is, short the ETF, buy the closed end fund (when at a discount) and wait to revert or the opposite if at a premium. This seems like a riskless arbitrage technique.

Anyone?
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Re: Arbitrage closed-end funds and ETFs?
Old 07-06-2005, 02:18 PM   #2
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Re: Arbitrage closed-end funds and ETFs?

See the following link. This is exactly the author's premise. If you're seriously interested, his book would be worth the price.

http://www.closed-end-fund-secrets.com/
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Re: Arbitrage closed-end funds and ETFs?
Old 07-06-2005, 02:35 PM   #3
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Re: Arbitrage closed-end funds and ETFs?

Wow! The innernet is quite the amazing place! I just hope the book isn't written in the same style as that website. Every 10 words a different color, and 1 sheet of paper that is 3 feet long

Thanks for the link.... Have you read the book? Is the strategy do-able?

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Re: Arbitrage closed-end funds and ETFs?
Old 07-06-2005, 09:37 PM   #4
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Re: Arbitrage closed-end funds and ETFs?

Quote:
Originally Posted by Olav23
they generally revert to a mean.

So, my thinking is, short the ETF, buy the closed end fund (when at a discount) and wait to revert or the opposite if at a premium. This seems like a riskless arbitrage technique.
Have you noticed cef's which are trading at a much larger discount than their mean historical discount?
It seems to me that discounts today aren't so large compared to their mean.

There are people who try arbitrage like you mention. So, there is competition.
Especially if you want to short the cef when at a premium. You might not find any shares to short.

If you're holding the cef while shorting an etf, you're paying the cef's ER. you also run the risk of a rights offering, which will cost you (and all shareholders) in investment bank fees, and probably make the discount even larger.
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