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FAQs: Closed-End Funds and SPACs Explained
- What is a closed-end fund?
- A closed-end fund (CEF) is a professionally managed investment company that issues a fixed number of shares through an initial public offering (IPO) and then lists its shares on a stock exchange or over-the-counter market. CEFs don’t continuously issue or redeem shares; instead, investors buy and sell shares on the open market.
Because of this structure, a CEF’s share price is determined by supply and demand and often differs from its net asset value (NAV)—the value of its underlying holdings. For example, if a CEF has an NAV of $100 but trades at $90, it is trading at a 10% discount.
- What is the difference between a closed-end fund and a mutual fund?
- The key difference is how shares are traded and priced:
• Mutual funds issue and redeem shares at the end of each day at their net asset value (NAV).
• Closed-end funds (CEFs) trade throughout the day on an exchange, like stocks. Their prices are determined by market demand—often
at a premium or discount to NAV.
Additionally, CEFs typically have a fixed number of shares, may use leverage to enhance income, and offer the opportunity to purchase assets below their underlying value—unlike mutual funds, which always trade at NAV.
- Why do some closed-end funds trade at a discount or premium?
- A closed-end fund's share price is driven by investor supply and demand, often causing it to trade at a discount (below NAV) or a premium (above NAV).
Several factors can influence whether a fund trades at a discount or premium:
• Market conditions
• Fund performance or yield
• Investor sentiment
• Name recognition of the fund or its manager
When a fund trades at a discount, it gives investors the opportunity to purchase its underlying assets below their actual value, potentially leading to enhanced returns if the discount narrows over time.
- What are the benefits of investing in closed-end funds?
- Closed-end funds (CEFs) are designed to provide attractive income along with the potential for total return.
Key benefits include:
• Income potential – Many CEFs are structured to provide consistent, attractive distributions.
• Total return opportunity – Potential benefit from both income and capital appreciation.
• Professional management and diversification – Actively managed portfolios across a wide range of strategies.
• Trading flexibility – Unlike mutual funds, CEFs can be bought and sold throughout the trading day.
• Discount opportunities – CEFs may trade below their net asset value (NAV), offering the chance to purchase assets at an attractive price.
• Broad market access – CEFs provide exposure to various sectors, asset classes, and specialized investment strategies.
- How many closed-end funds are there?
- As of December 31, 2024, there were 382 traditional closed-end funds, managing a combined $248.79 billion in assets, according to data from the Investment Company Institute.
- What is a special purpose acquisition company (SPAC)?
- A special purpose acquisition company (SPAC), also known as a blank check company, is a publicly traded company formed strictly to raise capital through an initial public offering (IPO) with the sole purpose of acquiring or merging with a private company. It has no operating business of its own.
SPACs offer an alternative way for private companies to go public. After completing a merger or acquisition, the private company becomes publicly traded. If the SPAC does not complete a deal within a set timeframe (usually 18 to 24 months) it is liquidated and the capital held in trust is returned to shareholders.
- What makes the pre-merger phase of a SPAC unique?
- The pre-merger phase of a special purpose acquisition company (SPAC) refers to the period after the initial public offering (IPO) and before a merger or acquisition is completed. During this time, the capital raised in the IPO is held in a trust account (typically invested in U.S. Treasuries or cash equivalents) while the sponsor searches for a target company.
What makes this stage unique is its combination of capital preservation and the potential for upside if an attractive deal is announced.
Shareholders also have two flexible exit options:
• Redeem their shares for a pro-rata portion of the trust account prior to the merger, if they choose not to participate.
• Sell their shares at market price on the secondary market.
This redemption right is no longer available once a business combination is completed. If no deal occurs within the specified timeframe, the SPAC is liquidated and capital is returned to shareholders.
