Funds can be broadly classified as either open-ended or closed-ended. Among the funds listed and traded on the SEHK, ETFs, adopt an open-ended structure, whereas SFC-authorised listed closed-ended alternative asset funds (LAFs) have a closed-ended structure.
Closed-ended vs Open-ended
The main difference between closed-ended and open-ended funds is that the open-ended funds generally allow investors to continuously subscribe for or redeem fund units, whereas closed-ended funds do not. Closed-ended funds generally do not allow investors to subscribe or redeem fund units directly from the fund, in other words, investors can only trade on the secondary SEHK market.
Closed-ended and open-ended funds may differ in their investment strategies, trading methods, as well as discount and premium.
- Underlying Investments
Since closed-ended funds typically do not have to meet frequent redemption requests from investors, they can generally invest in a greater amount of illiquid assets that may be difficult to sell in the short term, such as private equity, private credit, infrastructure and real estate.
Open-ended funds, on the other hand, generally have to meet frequent redemption requests, therefore they tend to invest mainly in liquid assets, such as listed stocks, bonds and money market instruments which may be easier to sell to meet redemption requests.
- Trading Methods
SFC-authorised closed-ended funds (including LAFs) must be listed and traded on the SEHK similar to stocks. Investors can buy fund units from, or sell funds units to, other investors in the secondary market on the exchange at the prevailing market price.
For SFC-authorised open-ended funds, they can be either listed and traded like stocks on an exchange, or unlisted. Units in unlisted open-ended funds can be subscribed to or redeemed directly in the primary market with the fund.
- Premium or Discount
Units of LAFs are traded at market prices, which are determined primarily by supply and demand. Market prices can deviate from the fund’s NAV, which is the total asset value net of total liabilities. When the market price of a fund exceeds its NAV, the fund trades at a premium; conversely, when the market price of a fund falls below its NAV, it trades at a discount. The market price of an LAF may differ significantly from its NAV and the gap may potentially persist for a prolonged period.
On the other hand, although listed open-ended funds may also be traded at a premium or discount, any premium or discount caused by supply and demand imbalance can usually be addressed by creation or redemptions of fund units.
When an LAF trades at a discount to its NAV, investors should not assume that buying at a discount is good. Fund prices are influenced by various factors, such as market sentiment. Significant discount may persist for a prolonged period of time and investors may not be able to sell at a price that reflects the fund’s value. Investors should carefully consider their own circumstances, including their liquidity needs and investment concentration before making any investment decisions. Investors should not allocate all or a significant portion of their investment portfolio into LAFs.
