Closed end fund (CEF) arbitrage and premium/discount theory

I found this excellent paper through the Simoleon Sense blog, which I think very highly of and read attentively. Their post: http://www.simoleonsense.com/attention-graham-dodders-new-paper-closed-end-funds-activist-investors-whats-the-attraction/

The link to the paper they discuss: http://yesandnotyes.com/blog/wp-content/uploads/2009/12/deo-Closed-End-Funds-and-Activist-Investors.pdf

The Simoleon Sense post:

Attention Graham & Dodders: New Paper Closed End Funds & Activist Investors: Whats The Attraction?

January 2, 2010

One of my very good friends Doug has put together a  paper on activist investing and closed end funds. Doug is the mastermind behind the yes & not yes blog.

Click Here To Read: Closed End Funds & Activist Investors: Whats The Attraction?

Abstract (Via Douglas E. Ott, II @ Yes & Not Yes)

This paper offers a basic description of why activist investors are attracted to closed-end funds and how this affects the rights of the closed-end fund shareholders. Part II provides a general description of the closed-end fund structure and a review of the research that attempts to answer why most closed-end funds trade at discounts to their net asset value (NAV). Part III outlines the reasons closed-end funds are attractive opportunities for activist investors. Part III also provides a detailed account of three proxy contests that occurred between activist investors and incumbent directors of closed-end funds: (1) the activists failed in their contest and there were no positive effects for shareholders as a result of their efforts; (2) the activists failed in their contest and there were positive effects for shareholders as a result of their efforts; and (3) the activists were successful in their contest and were able to enact measures that benefited shareholders. These real-life examples illustrate the motivations of the activists (e.g., return on and of their investments, concern for shareholders’ rights) and also the problems that seem inimical to closed-end funds (e.g., unitary boards, conflicts of interest, fund shares that trade at large discounts to NAV). Part IV argues that, contrary to the feelings of the managers and directors of closed end funds, activist investors can be a desirable element for all investors in the targeted closed-end funds as they may be able elect directors that are more independent and are often able to decrease the discount to NAV just with an announcement of a proxy contest.