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Shares of the Herzfeld Caribbean Basin Fund (NASDAQ:CUBA) increased in value over Tuesday and Wednesday by almost 25% before giving back around 7% on Thursday. Presumably this is due to Fidel Castro's illness and the resulting possibility that the embargo on Cuba may be lifted sooner than previously anticipated. This caused the -6.6% discount from Monday to turn into almost a 16% premium as of Wednesday's close, according to ETF Connect.

This price action seems to be a case of investors buying first and asking questions later. I can understand investors wanting to speculate on whether or not the embargo will be lifted. But the question I would ponder before investing in the fund is, even if the embargo is lifted, should CUBA trade at a 16% premium? One explanation for why a closed-end country fund would trade at a premium is that the CEF is the only way to access a market. However, there's no reason to believe that this fund will have exclusive access to companies that would benefit from the embargo being lifted. My guess is that many investment managers will quickly start offering Cuba focused funds if there is a chance to get management fees.

If the embargo is lifted, CUBA should theoretically do well based on its investment mandate. But if business with Cuba was more likely this week than last week, I would also assume that the prices of the fund's stocks should have increased this week, thus raising the fund's NAV by a percentage similar to the fund's market price increase. I could even accept that the market price should increase more and that the discount should decrease based on the recent news, but not by the roughly 20% that it has.

CUBA is obviously being managed with a very long-term focus (since the fund has been around over ten years, and we're still waiting for the embargo to be lifted) and I'm not passing judgment on the merits of CUBA as a long-term investment. But I would argue that the bidding up of shares this week is a good example of irrational pricing in the closed-end world.

CUBA 1-yr chart:

CUBA 1-yr chart

Source: Caribbean Basin Fund's Solid Week: Irrational Pricing?