What really drives the closed-end HF discount?
| Jun 25th, 2009 | Filed under: Academic Research, Investment Management Fees, Today's Post | By: Alpha Male |
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A couple of weeks ago, we examined the “rational irrationality” in the way that closed-end hedge funds are traded. While you’d expect a flood of new hedge funds listings during periods when secondary market discounts were low; that was not always the case. In fact, a lot of hedge funds IPO’d closed end funds during recent rough spots for the industry.
Our friends at Opalesque report last week from Monaco where Tarun Ramadorai of Oxford University was discussing his research into the field of closed end hedge funds. Regular readers may remember Ramadorai from a post we published last spring on secondary market pricing data from HedgeBay.
At the time, we only discussed the endogenous factors that went into determining hedge fund discounts – recent performance, historical volatility, portfolio liquidity etc. But there was one important exogenous factor that helps explain both closed end hedge fund and closed end mutual fund pricing: interest rates.
As this chart from Ramadorai’s 2008 paper clearly illustrates, discounts fall (premiums rise) when interest rates are down. (black and green = closed end HF premium, blue = 3 month T-Bill rate, both on a scaled vertical axis) More…
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