The Volatile Ride of Closed-End Funds in 2010

From Quantitative Easing and Europe’s sovereign debt crisis, to the ‘Flash Crash’ and sluggish economy, 2010 proved to be an eventful year in the markets. For closed-end funds, too, investors had a volatile ride to the last.

Sector Round Up: We’re ringing in the New Year after a choppy end to 2010. Closed-end fund discounts widened out to -4.35% in mid-November, only to rally back to a -1.62% discount on Nov. 30. Within a couple of weeks, however, discounts widened back out to -4.87%, as of Dec. 14. Investment Grade, High Yield and Preferreds experienced the most widening since the end of November, widening out 7.62%, 7.55% and 6.28% respectively. Only two asset classes narrowed in that time period: Specialized Equity narrowed 0.64% and Non-U.S. Equity narrowed 1.39%.

Like the past month, discounts were volatile throughout the year, getting as wide as -5.86% and as narrow as -0.83% (both of which occurred in May). Over the past year, Investment Grade Bonds widened 9.20%, mainly in November and December, marking the most extreme change in closed-end fund discounts over the past year. 

IPOs: 2010 was an up year for public offerings, with $5.9 billion raised through the third quarter of 2010, in addition to several issues occurring in the 4th quarter. That figure is up from $3.9 billion raised in closed-end funds in 2009, according to the Investment Company Institute.

Volume: Average trading volume of closed-end funds was approximately $565 million per day in 2010.  This was a significant increase in volume from 2009, when closed-end funds traded $438 million per day. Much of this change can be explained by asset growth. Closed-end fund volume hit an all time high on May 6, 2010 – the day of the ‘Flash Crash,’ with approximately $2 billion traded. 

Closed-end fund asset class market prices and net asset values were all positive for the year but their results were varied.  Specialized Equity on a market price basis had the highest returns of all asset classes at 28.03% for the year, while Covered Call closed-end funds had the lowest returns at 3.25%. 

RiverNorth Capital Management, LLC. is an investment management firm based in Chicago, IL. The firm specializes in quantitative and qualitative closed-end fund trading strategies and is the investment adviser to RiverNorth Funds.

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