I'll keep this article and introduction short. The ClearBridge Energy MLP Fund (CEM) and the ClearBridge Energy MLP Opportunity Fund Inc. (NYSE:EMO) are trading at uncharacteristically high discount rates of 47% and 44% respectively. Discount rates are somewhat likely to narrow in the coming days, as they have for other funds in several other occasions, and investors could significantly profit if they indeed do so. Consider a short-term trade of these two funds.
Discount and Premium Rates - Analysis and Context
I've been keeping track of discount and premium rates for MLP CEFs for the past couple of days. Due to significant market volatility, and as many of these funds are thinly traded, discount and premium rates for these funds have seen wild swings basically every day, sometimes reaching into the double digits. Traders should be able to leverage these discounts into profitable short-term trades by investing in heavily discounted CEFs, and profiting from narrowing spreads and discounts. Some of these trades have yielded double-digit shareholder returns in the past few days, somewhat independent of underlying market and industry conditions. Let's take a look at a couple of examples.
Example 1: First Trust Energy Income & Growth Fund (FEN)
FEN had an uncharacteristically large discount to NAV of 18% this past March 18, the largest discount rate in the fund's entire history.
FEN's shareholders have seen massive 38% returns since, vastly outpacing underlying NAV returns, or broader industry performance. Simply put, discounts narrowed, and shareholders profited:
Example 2: Goldman Sachs MLP and Energy Renaissance Fund (GER)
GER had an uncharacteristically high discount rate of 12% during March 12. The fund's investment managers had misstated NAV values in the days before, and investors dumped the stock once more accurate, and lower, figures were presented:
GER's shareholders saw returns of 40% the next
