Confessions Of A Closed-End Fund Bargain Hunter

Classical economics: All actors are rational and stocks are efficiently priced. Behavioral economics, per Nobelist Richard Thaler: Investors’ decisions are warped by emotion and ignorance and prices can get out of line.

Count Erik M. Herzfeld, a money manager specializing in closed-end funds, in the Thaler camp. He aims to buy when fund shares trade at an irrationally low percentage of liquidating value and sell at a high percentage. Unlike mutual and exchange-traded funds, closed-ends don’t do redemptions, and their prices are a matter of investor whim.

“Big discounts and big premiums. It’s behavioral,” Herzfeld says. “No one reads prospectuses.” Or rather, he reads and retail investors don’t.

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