Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

If investors want to win big in the current market, they need to be prepared to do a lot of work. Otherwise, they might as well just go to Las Vegas and try their luck at the tables.

Just consider debt-focused closed-end funds, which have shares that trade daily, pay dividends and use leverage to buy fixed-income securities. They delivered returns of about 9.5 percent on average in less than three months. That's remarkable in a ultra-low yield world, especially when macroeconomic strategies have been hammered by unpredictable market swings.

It's been so remarkable that Janus Capital's Bill Gross was compelled to write a Twitter post on Friday saying, "Closed-end Funds much better than hedge funds." He likes them because they use leverage, aren't subject to redemption risk and are often trading at a discount to the perceived worth of their assets.

But the reason these closed-end funds have gained so much is a bit more complicated than that. They are also a hotbed of activism from the funds' shareholders. And a growing number of those investors? Those hedge funds that Gross referred to.

Consider the Deutsche High Income Trust, which has gained more than 13 percent since Feb. 26. That was the day it announced that it was liquidating its assets and converting to an open-ended structure from a closed-end one. One of the dominant shareholders in that dispute was Saba Capital Management, which has plowed more than $800 million into closed-end funds in recent years. 

Disappearing Discount
Shares of Deutsche High Income Trust surged on Feb. 26 relative to its underlying assets
Source: Bloomberg

But this fund isn't the only example, and Saba isn't alone in its activism. A growing number of institutions are buying closed-end fund shares, such as Pine River Capital and Oak Hill Advisors, and some are using their ownership to wield influence over the funds' management. Specifically, some institutional investors buy a big enough stake to argue for managers to take action, such as liquidating funds or paying out a special cash dividend.  

Here are some examples of activism-fueled gains. There's the Managed High Yield Plus Fund, which opted to liquidate in recent months, sending its shares markedly higher.

Activist Boom
Shares of UBS's Managed High Yield Plus Fund surged after shareholders voted to liquidate its assets
Source: Bloomberg

It was a similar story with this Global High Income Fund, also managed by UBS, which also liquidated after a shareholder vote.

Lovely Liquidation
Shares of this UBS closed-end fund also rallied after its decision to liquidate
Source: Bloomberg

The main point isn't just that closed-end funds are a good investment, although they certainly have been for the most part this year. They're still vulnerable in a broad-based market sell-off or idiosyncratic risks because of a lack of trading in some funds' shares.

Rather, they spotlight that big returns don't come easy at this point. They require diligence, effort and sometimes intervention. That's where the reliable returns have been this year, in a time when almost everything else just seems like praying for luck.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net