Closed-End Funds Are Under Siege From Hedge Fund Raiders
Closed-end funds (CEFs) play a crucial role in shaping the financial well-being of retirement savers, and it’s possible you have a few of these funds in your investment portfolio right now. However, the CEF market has recently been disrupted by hedge fund raiders trying to make a quick buck, leaving long-term investors with nothing but the scraps.
How They Work
You’re probably familiar with what are called open-end funds, such as mutual funds or ETFs. Closed-end funds are very similar, except instead of continually issuing and redeeming shares as people buy and sell, these funds have a set number of shares that are traded in a market, like a stock or bond. Think of closed-end funds as a set number of seats on a bus that you can buy and sell, with the ticket price influenced by how many people want those seats. Open-end funds, on the other hand, can adjust the number of seats on the bus based on demand.
How They’re Being Exploited
Operating through hedge funds and other investment vehicles, so-called activist investors exploit discounts—when a CEF’s market price falls below its net asset value—to amass significant CEF shares and gain voting power.
These activists then raid the fund to unfairly make a quick profit at the expense of long-term shareholders. Activists often try to force a liquidity event, such as forcing a fund to buy back its shares, merge into a mutual fund, or liquidate. In these cases, the costs associated with a buy back can drastically erode returns for shareholders and a merger or liquidation may change or eliminate the investment as a whole, with unexpected tax consequences.
More recently, they’ve replaced entire fund boards, swapping existing investment advisers for the activist itself, and altering the CEF’s investment strategies to fit their agenda.
The consequences of these actions range from long-term investors being forced to accept higher expenses and new tax liabilities to finding themselves invested in a radically different product with an entirely new strategy. In some cases, the fund can cease to exist altogether.
How It Hurts Everyday Investors
Retirees, especially those relying on CEFs for income, value stability. Activist interventions can disrupt a CEF’s investment strategy, introduce uncertainty and potentially higher costs, as well as affect the reliability of a CEF’s dividend income stream, which many retirees rely on. Beyond the immediate financial impact, the long-term consequences of such interventions have far-reaching effects on the stability and sustainability of such investment products.
Click here to send a letter to Congress to make sure they are aware of the issues and harms of these hedge fund raider activities. Join us at Secure Financial Future as we strive to protect your investments and foster an environment conducive to long-term financial well-being.
