A Positive Theory of Closed-End Funds as an Investment Vehicle

42 Pages Posted: 22 Jul 2004

Date Written: July 2003


The paper offers a positive theory of the closed-end fund as an efficiency-driven organizational form of fund management. The theory is based on the observation that a closed-end fund is a public company with a guaranteed, long-term annual compensation for Fund management and on an assumption (acceptable within the classical rational-and-efficient-markets paradigm) that some small investors may place a lower premium on an asset's liquidity than the Market, yet are unable to acquire the asset directly.

A closed-end fund serves this clientele; the value of the closed end fund's shares is an algebraic sum of the assets-under-management plus the [capitalized] value-added by clientele service minus the [capitalized] value of the costs-of-management.

This approach is rich enough to explain the persistence of discounts, the relationship between a Fund's discount and its dividend policy, the zero correlation between discounts and interest rates, and the excess volatility of a Fund's share price. The paper's arguments are supported by our preliminary empirical study.

Suggested Citation

Cherkes, Martin, A Positive Theory of Closed-End Funds as an Investment Vehicle (July 2003). EFA 2004 Maastricht Meetings Paper No. 1317. Available at SSRN: https://ssrn.com/abstract=567084 or http://dx.doi.org/10.2139/ssrn.567084

Martin Cherkes (Contact Author)

NYU ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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