In light of surging concerns about mutual and hedge fund fixed income (and soon other asset classes) "gating", "runs" or outright liquidation, Deutsche Bank has prepared the following infographic which summarizes the main choke points which predispose both open and closed-end funds to runs or outright shutdown.
And some DB's commentary on the difference between open-end and closed-end funds:
Differences between open-end and closed-end investment trusts
The biggest difference between open-end investment trusts and closed-end investment trusts is in whether or not assets under management can be reduced and surrendered to individual redemption requests.
For open-end investment trusts, investors buy in with new money, and fund managers use the funds to increase purchases of corporate bonds and other assets for investors. When investors surrender the funds, corporate bonds and other assets are sold to raise funds to cover the redemptions (although some funds have cash pools).
For closed-end investment trusts, a certain amount of funds are collected when trusts are established and invested from the outset. Unless there are additional offerings, redemptions, or other changes, there are no fund inflows or outflows (except dividends received, cash distributions, etc). Consequently, closed-end investment trusts can have low liquidity assets. However, they provide sales opportunities via listing at exchanges (ETFs, etc.) or setting redemption targets.
No risks from closed-end funds?
Today, open-end funds are generating the greatest concern. With providing day-to-day cashability, they have expanded long duration and illiquid securities rapidly since the financial crisis. Maturity/liquidity transforming is viewed as a characteristic of shadow banking practices.
For closed-end investment trusts, investors cannot make withdrawals from the funds, so run risk is believed to be low. However, this is true only in relative terms. Risk does exist. For example, listed REITs can be sold and made cashable in a matter of seconds, but it takes several months to sell asset holdings. This entails major maturity and liquidity transforming. When ETFs, REITs, MLPs and other assets are used as leverage (for borrowing), asset holdings are subject to fire sale risk because of the difficulties in using them as fundraising vehicles.
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It is precisely this fire sale risk that we have seen in real time for the past several days.