Research On Closed End Fund Innovation

Since 90s of last century, 60 closed end funds emerged in our domestic history and only 30 of them are still in daily operation, but comparing with the number of 282 different open end funds, closed end funds are still hanging behind in their development. In western countries, closed end fund holds a very important position in a long period of history, although the problem of discount of the fund price is not the problem of our domestic markets only, the high level of discounting rate, of course, is really a detriment to the attractiveness of this investment type. There are lots of worldwide researches on the price discount problems of closed end fund and several solutions suggested, some of those solutions have been proven on overseas markets. Ever since year 2007, six new innovative-type of closed end fund have been introduced to our domestic market, aiming at reducing the rate of discounting, improving liquidity, and the development of closed end fund.Till now, there isn't any systematical research on the innovative-type of closed end funds about design of the terms of the fund and what the effects of these terms in China market are. There are a lot of practical reasons for the researches on those problems, working out correct innovations could reduce the discount rate and make the designed terms more met with the needs of investors which will improve the attractiveness, improve the overall liquidity of the closed end fund market and accelerate the development. What's more, based on the fact that the innovations in the financial products are essentially compatible, our research methods are very likely to apply to researches on other financial products successfully, such as the new introduced classified trust and financial products which are very similar to the closed end fund. So coming to the conclusion that, researches on the innovative-type of closed end funds will provide great guidance to the problem of how to design other better financial products, especially under nowadays' crisis which make the whole market less attractive to investors. If finding out more effective methods to design better innovative products, the financial market could be improved and liquidity could be sustained.The paper firstly leads the research on domestic closed end fund sorted by different categories and finds the price formula for different fund terms, and then I will test and prove those results using real examples. We will try to extent the pricing methods to other innovative financial products, and make my suggestions and new innovation methods proposals to recent innovation scheme.From the research, the paper has come to following conclusions: 1) Currently there are four kinds of closed end fund innovative terms, which are lifeboat term, structured products term, limited notional protection term and basic profit gap accrual compensation term. Those terms aims to improve the attractiveness by means of decreasing the discount rate of closed end fund or restructuring the products in order to meet diversified needs from investors. 2) Innovative-type closed end fund, essentially, is an ordinary fund companied by an option or a portfolio of options, including vanilla European options or path-dependent options, we could use Monto Carlo simulation or Black-Scholes formula to make our pricing calculation; 3) Through our experiments based on real products, the design patterns of existed innovative-type financial products are quite different from each other, and some of them obviously don't fall in a reasonable value extent. Re-design of those products would make them satisfy the investors' risk preference. 4) The innovations as closed end funds are just a starting, there will be more innovation schemes later on, such as the placement scheme for put warrants of closed end fund, which will be a more effective method to solve the price discounting problem compared with recent lifeboat term.