Closed-End Funds are those funds which issue shares only once, as opposed to open-ended mutual funds, which continually issue and redeem shares. Like mutual fund shares, CEF shares can trade on the open market, but unlike open ended funds, CEFs can be bought and sold at any time, as opposed to being redeemable only at the end of the day.

Q. Probably everyone’s hear about these as an alternative to traditional mutual fund structures, but what’s special about them?
A. First, let’s get the basics: most mutual funds are “open ended”: they keep taking investor dollars and issuing new shares, which can be redeemed on any day directly from the fund. But with a “closed end fund”, there’s just one IPO date (like a normal company). The shares trade on the market, like stocks.

Q. And the practical implications of that are what?
A. Number one: open end funds must necessarily be invested in highly liquid strategies (because they have to be able to redeem shareholders out in a single day); but closed end funds can invest in more illiquid things. So, we’re seeing a lot more “alternative” strategies being executed inside closed end funds: as in investor, you get a liquid instrument, but the fund itself can be in illiquid instruments, like distressed debt.

Q. OK, so that’s a big point. A CEF opens up the investible possibilities. What else?
A. Well, rather famously, the structure means that there can be, and usually is, a difference between the fund’s NAV and its traded price: the securities inside the fund might be worth $100/share, but it might just trade at $90. (Doesn’t happen with an open end fund, which are always redeemed at NAV.) That difference, the one between the share price and the NAV, is where some hedge funds try to find arbitrage opportunities.

Q. To exploit that difference. But, that seems pretty straightforward, why can’t just anyone do that?
A. The simplistic view, that I’m buying $100 worth of stock for $90 and that the NAV and share price will come into line, frequently doesn’t work…. That spread might just continue to exist, or even get bigger. So what hedge funds try to do is look at comparable CEFs and exploit relative differences in the discounts; or, to take the view that the discount on one is out of line with historical norms and will return there, similar to a lot of stat arb strategies.