tag:blogger.com,1999:blog-2222178257396625999.post8354537443432644677..comments2023-11-02T00:57:47.668-07:00Comments on Research Intensive Investing: Underperforming CEFs as a hedging strategy?Research Intensive Investinghttp://www.blogger.com/profile/17574978502928876520noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-2222178257396625999.post-69258685179522330762007-06-06T10:31:00.000-07:002007-06-06T10:31:00.000-07:00Hi Jeremy,Thanks for the comment. I agree with m...Hi Jeremy,<BR/><BR/>Thanks for the comment. I agree with many of the concerns you brought up, and thought I would address point by point:<BR/><BR/>1) Discount/Premium risk--I am looking at chronic underperformers that have a relatively tight NAV/premium range, and have historically gone down more than their NAV in market drops. Still a risk, but only over short periods of time, and should work in my favor in bad times.<BR/>2) On high distributions, this is true mostly of the income funds, but less so of the stock funds, which sometimes pay dividends in stock, but that's meaningless. Anyhow, as long as the total returns are poor, it should not matter how that is distributed between capital appreciation and dividends.<BR/>3) Most the CEFs I'm looking at have virtually no short interest, so borrowing should not be an issue.<BR/>4) bid/ask spread is a good point, though I'm trying to look at some of the more liquid ones<BR/><BR/>The other ideas you mentioned are possible options but, for various reasons cited in the initial write-up, I believe CEFs may be a more favorable way to play this.Research Intensive Investinghttps://www.blogger.com/profile/17574978502928876520noreply@blogger.comtag:blogger.com,1999:blog-2222178257396625999.post-70433903115086503112007-06-05T08:10:00.000-07:002007-06-05T08:10:00.000-07:00While shorting CEFs may be a way to take advantage...While shorting CEFs may be a way to take advantage of higher expense ratios and potentially capture narrowing premiums and widening discounts there are also unmentioned downsides. First, the additional layer of premium/discount risk. Typically CEFs trading at a discount offer some downside protection during market declines, i.e. the market price falls less than the NAV in a down market narrowing the discount. Secondly, CEFs commonly pay high distributions as often as monthly which would have to be covered by the short seller. Finally, unlike an ETF which provides a market maker, CEF shares must be borrowed from a shareholder just like a common stock; in less liquid funds (read the poor performers you would want to short) it may be difficult to find the shares. Additionally in these less liquid funds there is a wider bid/ask spread detracting from performance.<BR/><BR/>With this in mind even if you are looking for a broad based short you may be better looking to shorting a high expense ETF, buying an inverse market ETF, or moving into the futures market.Unknownhttps://www.blogger.com/profile/16538766940913338522noreply@blogger.com