Presentation on theme: "TACTICAL TRADING STRATEGIES FOR CLOSED-END FUNDS Mark Dauenhauer Nina Gené Vince Groff Wee Yee Brad Winer InternationalDiversified Equity Advisors (IDEA)"— Presentation transcript:
TACTICAL TRADING STRATEGIES FOR CLOSED-END FUNDS Mark Dauenhauer Nina Gené Vince Groff Wee Yee Brad Winer InternationalDiversified Equity Advisors (IDEA) International Diversified Equity Advisors (IDEA)
What is a closed-end fund? Publicly traded investment company Fixed number of shares issued through IPO Trade on market exchanges (NYSE,AMEX) Types: growth, value, sector, small-cap, country funds … Traded at a non-constant premium/ discount
Initial Observations We noticed negative correlation between current month price returns and previous months premium –Japan OTC Equity Fund, -11% correlation –Asia Pacific Fund, -13% correlation We noticed that premiums/discounts persisted for months/years These observations led to 2 strategies
Naïve Strategy An equally weighted portfolio of all 29 funds gives the following performance:
A Better Strategy Going long in the 5 highest discount funds and short in the 5 highest premium funds with uneven weights (30%,30%,20%,10%,10%) gives:
A Winning Strategy We divided funds into ‘good’ and ‘bad’ based on a 3 month moving average of the premium/discount We buy the ‘good’ funds with the lowest premium and short the ‘bad’ funds with the lowest discount. We used uneven weightings as follows:
Other Attempts We tried to predict the existence of a premium or discount based on the performance of the underlying NAV vs. a benchmark –And Got Nothing! We looked at a 6 month hold strategy for each of our strategies and found that the 1 month hold strategy worked better.
Another Idea to Pursue Calculate a Beta of the price (or premium) vs. the NAV for each fund. Use a prediction regression to predict NAV movements or use a sort strategy Trade on funds that have highest premium sensitivities to NAV movements (high Betas)
The Future: Shareholder Activists Activists target funds with poor NAV performance 8 funds have converted into open-end format 5 funds had to be liquidated (2.3 bn) 27 funds announced share buybacks Removing fund managers Mandatory distributions
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