"feng Zhuankai Impact Studies," China's Closed-end Funds

As one way to resolve the expiration of closed-end funds, transition of closed-end fund to open-end fund is an international trend. On August 9, 2006, ChinaAMC Xing Ye Fund began remove the market, which regarded as the first case of fund reform in China for the matured closed-end funds convert into open-end fund. This marked the beginning of closed-end funds with total 81.7 billion units convert into open-end funds. It's estimated that there will be a huge room for the development of China fund industry.Closed-end funds usually have a fixed number of units sold to investors and trade on bourses like normal securities. They often have a life span of between 10 and 15 years, during which time investments cannot be redeemed. Open-end mutual funds sell their shares directly or through a brokerage firm. Investors can choose to redeem the funds at any time after the initial lock-up periods. The influence of transition of closed-end fund to open-end fund is broad and far-reaching, not only changed the characteristics of the fund itself, but also to fund holders, fund managers, fund market and the relative factors. So this makes it necessary for their theoretical and empirical analysis. The paper focuses on the theme.Firstly, the paper discusses the way to resolve the expiration of the closed-end funds. Since shareholders don't redeem shares of a closed-end fund, its actual share price to stray from its net asset value. As investors who think the actual value of the fund's holdings is less than its net asset value outnumber optimistic investors, the fund's share price falls and trades at a discount to net asset value. The fund is able to invest a greater share of its assets in securities that are less liquid than those which open-end funds invest in. But an open-end fund is required to calculate its net asset value daily which face redemption pressures if not performing well. Due to the inherent flaws of closed-end funds, excessive discount, holder promotion and the due date approaching, transition of closed-end fund to open-end fund is the best way to choose.Secondly, the paper discusses the influence of transition of closed-end fund to open-end fund on theoretical analysis. The main analytical tool used in efficient market theory, principal-agent theory and the theory of fund performance. The conclusions are as follows:According to efficient market theory, after the transition of closed-end fund to open-end fund, the fund let investors redeem holdings. Most investors who buy closed-end funds can obtain solid returns that are trading at large discounts. A closed-end fund that invests in illiquid securities may not receive daily valuations for all of its holdings. But an open-end fund values the holdings in its portfolio daily, the net asset value of an open-end fund is a better barometer of its fair market value on a per-share basis. Constraints on fund make managers have an incentive to improve fund performance and can reduce or eliminate "moral hazard". Investing in closed-end funds can be very confusing. Enhancing the performance of funds can make capital inflows more sustainable. Poor performance may cause investors redeem the fund and markets to plunge further. Even closed-end funds will face risks of liquidation. Thirdly, through empirical testing, the paper discusses the correctness of the theoretical analysis. Practice proves that, in corresponding to the transition of closed-end fund to open-end fund of ChinaAMC Xing Ye Fund, there were many reactions: the price flushed; the discount decreased and then disappeared. There were many opportunities of arbitrage. Cumulative abnormal returns were positive. Institutional expansion brought. Investors not only chose the fund which had arbitrage for expiring, they also chose the fund which had high discount rate for long-term investment value. But there was little change on the performance and liquidation of the fund. The risk-adjusted rate of return didn't change a lot. The industrial concentration and stock concentration were also high. The new funds still hid great risk.Finally, in the light of theoretical and empirical conclusions, recommendation for the fund managers, regulators and investors are: full disclosure of information; stable transition should be taken; improve the fund operation performance; balance the interests of fund holders; increasing assets liquidity; continued marketing; continued development of ETF and LOF; improving the legal and regulatory system, adhere to market-oriented principles.