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Andrew Dakos and Phillip Goldstein’s New Bullish Bet

Andrew Dakos and Phillip Goldstein’s Bulldog Investors disclosed a 5.3% stake in Taiwan Greater China Fund (TFC). The stock is up 2.4% today and currently trades at a 4% discount to its NAV. Bulldog Investors have been investing in closed-end funds that trade at a discount to its NAV and then force the management to take actions that will close the gap. They usually take activist stakes but in this case they didn’t.

Closed-end funds occasionally trade at a significant discount to their Net Asset Value (NAV). It isn’t surprising to see discounts of 10-15%. Fund managers don’t have a lot of interest to close this discount. As a result some closed-end funds trade at a discount for an extended time period. Activist hedge funds buy 5-10% positions in these closed-end funds and try to force the funds’ operators to take action. They take larger stakes if they can hedge their NAV risk effectively.

The most important weapon in their arsenal is proxy contests. They can change the funds’ board and take control of the fund. Another action that they can take is to file shareholder proposals for contingent tender-offer plans. If these plans are accepted, the company could do a partial tender offer when the discount reaches a predetermined threshold. The main problem is that funds’ operators want to keep the fee income, so they usually don’t want to take any action that will reduce their assets (and fees). That’s why activist investors’ success ultimately depends on their ability to win a proxy contest.

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