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Wednesday, January 11, 2006

Insider Buying At Closed-End Mutual Funds

The other day, The ETF Investor mentioned that there had been some insider buying in the Equus closed-end fund, and that could be a signal of good things to come.

At the time, I was puzzled by the statement. Usually, insider trading patterns provide information to the market because of asymmetric information (i.e. insiders know more about the company's prospects than the market does). I was at a loss to explain how this could apply in a closed-end fund.

So, I called a friend who does mutual fund research. His guess is that looking at insider trading patterns for closed end funds could be useful if they helped predict the fund changing status from a closed-end to an open-end fund. When closed-end funds that trade at a discount change to open-end status, their discount often disappears. So, seeing insiders buy could affect the market's probability of a change in status, and could be therefore be followed by a decrease in the discount (i.e. a rise in the fund's price per share).

Now, there's a follow up: it turns out that a lot of the action came from the fund advisor buying shares from an activist investor. So, the likelihood of an opening of the fund has just dropped.

Click here and here for the original and follow up pieces.

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