Listed closed-end funds
In Hong Kong, there are a number of funds listed on the Stock Exchange of Hong Kong ("SEHK"), including open-end funds such as Tracker Fund and closed-end funds. Unlike open-end funds which have no restriction on the number of units, closed-end funds have a fixed number of units. Listed closed-end funds generally do not continuously offer their units for subscription and their units are not redeemable. You can only buy or sell the fund units on the SEHK which provide you with an opportunity of intra-day trading of the fund just like trading of listed stocks. You need to pay a brokerage commission, transaction levy, trading fee, stamp duty and other charges similar to those paid for trading stocks.
Funds that seek to invest in securities and other assets which tend to be more illiquid are typically organized as closed-end funds as the closed-end structure would enable the fund manager to more effectively and efficiently manage illiquid investments. You should therefore read the prospectus to have a good understanding of the fund, in particular its investment strategy and related risk factors, prior to trading in the fund units.
In essence, the key characteristics that distinguish a listed closed-end fund from a non-listed open-end fund are that:
- a closed-end fund does not provide an ongoing creation and redemption facility at the net asset value ("NAV") of the fund;
- its units trade on the SEHK like a listed stock rather than being redeemed directly by the fund;
- it trades continuously on the SEHK during the trading hours while a non-listed open-end fund generally is only available for subscription and redemption at the close of business on each dealing day (which could be daily, weekly or monthly, etc); and
- a closed-end fund trades at the prevailing market price which depends highly on the demand and supply of the units in the market. There may not be an actively traded secondary market for the fund which may trade at a significant discount of or premium to its NAV. In fact the possibility of a significant gap between the trading price and the NAV of the fund poses a major risk of a listed closed-end fund.