Back in December, the closed end fund Fiduciary/Claymore Dynamic Equity Fund (HCE) announced that its Board adopted a proposal to liquidate the fund. The stock price jumped from 3.25 to 4.25-4.50. On the day of the announcement, the fund was trading at a discount of 27% to its net asset value. After the announcement, the discount narrowed to roughly 6%.
I believe this is a pretty good risk arbitrage opportunity. I think most of the shareholders will vote to liquidate. And after reviewing the actions of investors like Goldstein and Lipson, who have battled against closed end fund management that have refused to step down or otherwise make improvements for shareholders despite the fact of huge discounts to NAV or the fund is simply not meeting its benchmarks or objectives, when management actually advocates an action such as liquidation, I would take them seriously.
However, one would usually try to hedge the purchase of HCE in order to lock in the current 6% discount to NAV. The fund’s top holding is 5.8% in S&P depository receipts, followed by smaller positions in individual stocks such as AT&T, JP Morgan, IBM, and Honeywell. I’m not quite sure how one could acquire a good hedge. A dirty hedge might be to purchase SH, an etf from Proshares that tracks the inverse of the S&P 500.
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