1. the vast majority of CEF's that currently trade at a discount use leverage. i know as i own some (BWC is an example). when AGD/AOD trade at a discount again, the leveraged CEF's will trade at a larger discount than they do today.
2. the fund has financial statements and i don't think they are too complex for their accounting firm to prepare/understand. it is hard to play games with div income.
it appears mgmt made their numbers for 2008 (covered div income paid by div income recvd). i suspect they did it with one-time special dividends. i posted some hypothetical numbers before, in terms of how you get to the $2 annual div.
that is the big question here and i sure hope one of the ANALysts will ask how much div income was captured via special dividends. if they don't ask, they should all be fired. special dividends are akin to return of capital as the underlying stock is not going to recover to pre-special div levels in 30-60 days. so you definitely take a hit on NAV when you chase those (i think this is the case in a down or up market).
so that is how the mgmt can make the statements that they do. div income is covering div paid out. but NAV has likely taken a hit as a result of this method. that said, it doesn't appear that the hit is significant as the decrease in NAV is not much more than the decrease in the major market indices.
and remember, mgmt claims that their div capture portfolio has performed better than their buy/hold portfolio - in terms of % decline in NAV. they don't really need to make that statement if it isn't true. if they said the NAV on the div capture lagged the buy/hold, i don't think it would cause a stampede from the stock.
there's some smoke and mirrors here. no doubt. but it isn't as dire as NAV going to zero or 2/3rd's of div income is really return of capital or mgmt is like fuld at LEH or schwartz at BS. soon, they will have to reduce the dividend, probably in the next div announcement. a 20% reduction wouldn't be horrible to the holders (50% would). mgmt is going to look ahead and see what they might be able to generate on the income side in order to maintain their capital base.
They don’t leverage in classic terms, they don’t issue preferred shares. They buy/short currency using margin. And in currency world they allow leverage 10:1. Strategy long British pound and short US dollar worked fine for a long time. So you get higher interest rate on British pound (long position), pay small interest rate on short US dollar position and have some money to pay as dividend. When dollar started to move to a higher, they probably got margin call, liquidated this hedge and lost money. (This is my guess just because NAV started to drop significantly when dollar started to rise. They never say a word about currency hedges; other than they publish on the website they allow to do it.). My question to you is: Since this is not stock transaction, it is all money/money with loss; do you consider dividend paid from this hedge as an earned income or return of capital?
sorry for lack of response, i've been on vacation. i don't know about any currency hedges they may or may not do. or how it would be treated.
my best guess is they have trading accts overseas in order to buy the foreign stocks (not listed in the US). so if they've got 5% of the portfolio in UK listed stuff (bought in pounds), they might buy a hedge that would negate any gain/loss from change in the exchange rate back to dollars.
i doubt they are using this as a way to manipulate earnings. and it is hard for me to believe this would show up in the NAV calc. it is easy to check stock prices to update NAV daily but how would one treat a currency hedge ? you would want to adjust the NAV for any hedge but i doubt the adjustment is imbedded in the NAV that you get by entering the symbol XAGDX.