Closed-End Equity Funds

Abstract

Can discounts and premiums on closed-end equity funds be used to earn positive excess returns over a benchmark index? Research in the U.S. market has found that investors could have earned higher returns than a benchmark of U.S. stocks by purchasing shares of closed-end funds with discounts. This research examines an extensive sample of U.S. and U.K. listed closed-end funds September 4, 1998, through 1991, including transaction costs, an important element in evaluating portfolio performance that is absent from previous work. While long portfolios with deep discounts outperform a benchmark index, provided transaction costs are low, the surprise is that short portfolios with deep premiums outperform the benchmark and long portfolios, provided transaction costs are moderate to high.