Closed-end fund

Closed-end fund

What is a closed-end fund?

Closed-end funds (CEFs) are investment companies that pool the assets of shareholders to invest in a wide range of securities. There are two varieties, publicly traded and unlisted, and both are regulated under the Investment Company Act of 1940. 

Publicly traded (traditional) closed-end funds issue a fixed number of shares through an initial public offering (IPO). Shares of traditional closed-end funds trade on an exchange and, therefore, investors can buy and sell shares of traditional CEFs just like a stock. 

Unlisted CEFs typically offer a fixed number of shares over longer periods of time, typically several years. The shares of unlisted CEFs are not publicly traded. Investors may redeem their shares at defined intervals, typically monthly, quarterly or semiannually. The amount redeemable is normally subject to a cap based on the percentage of shares outstanding. 


How big is the traditional CEF market?

Closed-end funds are highly diverse and invest across a broad range of geographies, asset classes and strategies. CEF assets under management grew from approximately $139 billion following the financial crisis to over $270 billion in 2023. There are over 515 traditional closed-end funds in the market today.1

Total net assets, U.S. closed-end funds¹

Total net assets, U.S. closed-end funds were around $150B in 2009 and have risen to $270B in 2023.

Key differences between closed-end funds and mutual funds

The biggest difference between traditional closed-end funds and open-end funds (or mutual funds) is that closed-end funds issue a fixed number of shares through an IPO while open-end mutual funds continuously offer shares and trade daily based on the fund’s net asset value.  

Since traditional closed-end funds issue a fixed number of shares, CEF share prices are based on supply and demand and investors’ views on the manager, strategy and portfolio. In this way, managers of closed-end funds do not have to manage investor redemptions like that of open-end mutual fund managers – especially during periods of market volatility.  

Another key difference is that CEFs are not limited in their ability to invest in less-liquid and illiquid assets. Unlisted closed-end funds can invest substantial portions of their portfolios in illiquid investments.


Investor considerations 

Closed-end funds may trade above or below the fund’s net asset value based on supply and demand for the fund’s shares and other technical factors. Unlisted closed-end funds also provide limited liquidity. 

When investing in closed-end funds, financial professionals and their investors should first consider the individual’s financial objectives. Investment constraints such as risk tolerance, liquidity needs and investment time horizon should be taken into consideration.

  • Morningstar, as of September 30, 2023.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Education

Understand the key features of mutual funds

Search our site