4 ms·
Although this is indeed how mutual funds work, there are other models: https://en.wikipedia.org/wiki/Closed-end_fund https://en.wikipedia.org/wiki/Closed-end_f
by tacostakohashi 10y ago
Although this is indeed how mutual funds work, there are other models:
https://en.wikipedia.org/wiki/Closed-end_fund https://en.wikipedia.org/wiki/Closed-end_fund
Can't be redeemed, can only be sold on the open market to a new buyer - e.g., ADX.
https://en.wikipedia.org/wiki/Exchange-traded_fund https://en.wikipedia.org/wiki/Exchange-traded_fund
Can only be redeemed for the underlying basket of stock (not cash), so the administrator doesn't have any liquidity problems to contend with - e.g., SPY.
Are these better, or worse than the mutual fund model? It's hard to say - with the closed-end fund setup, it's likely that they'd just end up with a deep discount to their nominal asset value in times of selling pressure, but at least you can still get out if you need to, and it creates a good buying opportunity for those with spare cash in tough times.
- Blackthorn 10y agoEven ETFs can have similar issues to mutual funds when the underlying asset is illiquid. ETFs will trade at an immense discount as the fund is sold faster than the underlying can be shorted. This happened to $JNK recently.
- eru 10y agoHow long did that last? Longer than a day? (Seems like a huge arbitrage opportunity, otherwise.)
- Blackthorn 10y agoIt's not really accurate to call it arbitrage if you can't simultaneously short the underlying. You'll be looking at something (imo) not unlike pin risk. And just like pin risk...well, it's risky. JNK wasn't as bad as I remember, according to the stats on Morningstar it had a discount of 1.15% at the worst.
- eru 10y agoI meant in a more general sense: it's closer to something uncertain like statistical arbitrage. Thanks for looking up the numbers. 1.15% seems entirely reasonable compared to having your money locked up.