Managerial Rents vs. Shareholder Value in Delegated Portfolio Management

There are two different organizational forms of mutual funds: closed-ended and open-ended. Closed-end funds (CEFs) issue a fixed number of shares that trade on secondary markets, while open-end funds (OEFs) issue and buy back shares at a price equal to the underlying net asset value on a daily basis. When the Investment Company Act, an overarching law governing the mutual fund industry, was enacted in 1940, the dominant form of mutual funds in the U.S. was the CEF. However, by the end of 2014, the total value of net assets managed by U.S. CEFs amounted to less than 2% of the value of net assets managed by OEFs ($289 billion versus $15.9 trillion). The predominance of the open-end structure is puzzling because, from a portfolio management perspective, the closed-end structure has many advantages. For example, it allows fund managers to take illiquid positions without worrying about money flows into or out of their funds.