Eric Boughton_

Three Closed-End Funds of Funds

Interesting finds, George. I run a hedge fund that applies the strategy of buying closed-end funds at discounts to NAV, so I am pretty familiar with this area. Every single one of the closed-ends we bought in 2006 (about 30) saw its discount to NAV narrow (or disappear) by the end of the year. Intriguing possibility that the tail end of that could have been due partially to FOF. (Our hedge fund, Matisse Income Fund, is up 23.5% (net after all fees) since inception October '05.)

We have also seen a number of activist hedge funds purchase closed-ends at discounts, then sue the company to 1) convert to an open-end (discount disappears obviously), or 2) buy back shares at close to NAV. One typical example is Karpus, and their involvement with IMF. Our hedge fund is currently only $12 million, so we don't quite have the size to push the closed-end boards around like Karpus can.

Wanted to point out your "double discount" calculation on ADX is a bit misleading, however, given that PEO only makes up about a 5% position in ADX. Taking that into account, the net "look-through" discount on ADX only goes up to about 14%.