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Alpine Global Dynamic Dividend Message Board

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  • danbrady danbrady Jan 31, 2009 11:06 PM Flag

    Hi Danbrady, do you happen to know...

    Hi movealldirection; I'm going to cheat a bit and answer an easier question than the one you asked. Rather than look at AOD vs ADVDX specifically, I'd rather talk about some of the important differences I see between closed end mutual funds (CEFs) and open end mutual funds (OEFs). I tend to think that all of the following points give an edge to CEFs, and when given a choice between two funds running a similar investment strategy, if one of them is a CEF, then it gets the nod from me.

    Difference #1): CEFs don't need to maintain a cash buffer. Shares purchased or redeemed from an OEF are handled directly by the Fund itself. When new money flows it, it usually just goes into a cash fund until the fund managers get around to investing it. When share redemption requests come in, the fund managers pay the seller with money from the cash account. This cash account can represent anywhere from 5% to 15% of a fund's managed assets, and that looks like a sizable chunk of money not being well deployed to me. CEFs get their money from share issues, and once they have the funds they are free to invest all of it, and keep it working at all times if they choose.

    Difference #2): Redemption and inflow activity at OEFs often gives the fund managers a dilemma. Since most people manage to buy high and sell low, redemption activity often peaks when the fund holdings are performing poorly. With a need to sell some of the assets to pay redemptions, should the managers sell the poorly performing holdings, and lock in a larger relative loss, or should they sell the better performing holdings, and have a fund with proportionally larger poor performers? Neither choice is appealing. A similar situation occurs when money flows in because the fund has been having a good spell. Should the money be invested in holdings that are already riding high (buy high?), or do they run the risk of hurting the fund by investing instead into worse performing issues? CEFs, by comparison, are not effected by redemptions or inflows, as the shares merely get traded between owners on an open market. CEFs are therefore not pushed to buy high or sell low by money flowing in or out of the fund, unlike OEFs.

    Difference #3) OEFs can mask "return of capital" activities much easier than CEFs. ROC activity is the norm for OEFs; CEFs usually make a point to declare ROC explicitly when it is or isn't being utilized. I don't want to get messed up with funds using ROC.

    Difference #4) CEFs most often trade as exchange traded funds, while OEFs trade entirely as single-price per day blind trades. An investor can use limit orders on both buying and selling to fish for locally better prices for CEFs; where the only option with OEFs is to guess from market activity which way the NAV of the fund will most likely move after market close.

    Difference #5) A consequence of being exchange traded, CEFs can run at a premium or a discount, while OEFs always reflect their NAV. During normal market conditions, discounts represent opportunity for a buyer, and premiums a nice opportunity for a seller. Occasionally, during periods of extreme mass hysteria (or widespread forced deleveraging) the discounts can become extreme and represent extreme opportunities to obtain ownership at a deep sale. The rebound from such deep discounting is also something to keep an eye out for, as the overshoot to the upside is often not sustainable, and represents a second opportunity to trade the security. In my IRA accounts, which have no capital gains issues, I will occasionally sell CEF holdings obtained at a deep discount, when they've bounced strongly and developed a strong premium to the up side. Normally within a week if not days, the price drops back down to NAV or below, and I'll re-enter with the same amount of money, but obtain a nice percentage bump in the number of shares.

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