Friday, June 15, 2007

SLCG Research: Closed-end Fund IPOs

SLCG released today ‘Closed-end Fund IPOs’.

In this paper, Dr Edward O’Neal explains how closed-end funds trade at a discount to their net asset value (NAV).  Dr O’Neal finds that at the initial public offering (IPO), a closed-end fund’s offering price is set at its NAV. Yet during the year after the IPO, a closed-end fund’s price drops as much as 5% from its offering price at the IPO. Furthermore, investors pay huge commissions on the sale of the closed-end fund, generating a premium in the closed-end fund at the IPO.

Given the premium at the IPO and the subsequent discount after the IPO, investors are warned not to buy closed-end funds at the IPO.

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