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Primary Article

Leveraged Closed-End Equity Funds

Evaluating the Risks and Rewards

Albert J. Fredman and Eugene L.. Destabler
The Journal of Investing Spring 2000, 9 (1) 73-82; DOI: https://doi.org/10.3905/joi.2000.319402
Albert J. Fredman
A professor of finance at California State University, Fullerton. He has coauthored several books on investment companies, including the second edition of
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Eugene L.. Destabler
Vice President of administration, of General American Investors Company, Inc., in New York. He is president of the Closed-End Fund Association, Inc., and served as the initial chairman of the closed-end fund committee of the Investment Company Institute.
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Abstract

Since 1996, a handful of closed-end equity funds have issued non-convertible preferred stock to raise additional capital. Because of favorable long-term interest rates and a 1989 tax ruling stipulating that distributions of investment company income and capital gains must be allocated proportionately to preferred and common shareholders, this form of leveraging has become particularly appealing. This article review the different ways close-end funds can raise capital. It analyzes the concept and risks of leverage, examines the history of leveraged close-end municipal bind funds, and then focuses on the use of leverage by equity funds. While preferred leverage can enhance long-run returns, it also increases risk and may pose problems for manager in bear markets. S&P 500 rolling five-year returns are analyzed over the 1945-1998 period to determine the potential impact of leverage during favorable and unfavorable markets.

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Leveraged Closed-End Equity Funds
Albert J. Fredman, Eugene L.. Destabler
The Journal of Investing Feb 2000, 9 (1) 73-82; DOI: 10.3905/joi.2000.319402

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Leveraged Closed-End Equity Funds
Albert J. Fredman, Eugene L.. Destabler
The Journal of Investing Feb 2000, 9 (1) 73-82; DOI: 10.3905/joi.2000.319402
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