Capital Inflows and Outflows in Closed-End Funds

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Capital Inflows and Outflows in Closed-End Funds

After the initial public offering of shares, there are only five ways to increase capital within the portfolio of a closed-end fund:

• Making sound investment choices that appreciate and thus increase the net asset value
• Issuing debt, thereby leveraging the fund
• Issuing preferred shares, thereby leveraging the fund
• Conducting a secondary share offering (selling new shares to the public)
• Conducting a rights offering (giving existing shareholders the right to invest more capital into the fund in proportion to their existing ownership).

Similarly, there are only five ways capital can flow out of a closed-end fund:

• Distributions to shareholders
• Poor investment decisions
• A tender offer to repurchase shares, which is a method to control discounts
• For leveraged funds only, forced sales to remain in compliance of leverage limits
• The liquidation of the fund

So, because capital does not flow freely into and out of closed-end funds, they are referred to as "closed-end" funds.