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Cornerstone Progressive Return Fund may pull back after Rights Offer

|Includes:Cornerstone Progressive Return Fund (CFP)

The Cornerstone Progressive Return Fund (NYSEMKT:CFP) is a closed-end fund (NYSEMKT:CEF) which invests primarily in other CEFs.  It historically has traded at a 30% premium to NAV (possibly because of their managed distribution policy that returns capital to investors every month), but recently has been trading at about 50% premium to NAV.  It appears that investors are trying to get involved in the rights offering that CFP will offer to shareholders on April 1.  Investors will be given 1 right for every share they own, and every three rights will enable them to buy 1 share of the fund for the greater of 102% of NAV or 90% of the market price. 
CFP currently trades at 8.40 so if one owns 100 shares at 8.40 and they elect to exercise their rights, they will have 100 shares @ 8.40 and 33 shares at the market price on April 1 times 0.9.  If CFP closes at 8.40 on April 1, then shareholders will recieve their shares for 8.40*0.9 or 7.56.  This results in an average price of 8.19 which is a 46% premium to their most recent NAV of 5.60. 
If one believes that the premium to NAV will return to the average of 30% after the rights offer, then the price should drop to about 5.60* (1.3) or 7.28. 
If shorting illiquid, hard-to-borrow CEFs is appealing to an investor, then there appears to be about $0.91 profit in shorting CFP with very little downside risk.    

Disclosure:  I currently have no position in CFP, but may short some shares if the price continues to rise.

Stocks: CFP