A Performance Evaluation Of ’Open-Ending’ Closed-End Funds In China

Open-ending of closed-end funds is one way to address the issue of expiration, which means closed-end funds is converted into open-end funds to make the market price equal the NAV (net asset value). In the view of domestic and foreign experience, this method has become an international trend:in the United States there are many closed-end funds transited into open-end funds every year; in Taiwan the closed-to-open transition has become booming since 1990s; in Czech the transition has also begin from 1998; in China, the procedure formally starts in 2006.The primary objective of the open-ending procedure is to eliminate the discount problem to protect investors’interests. On august 9,2006, the Xingye fund succeeded in being transited from the closed-end funds to open-end funds, which is the first case in China. Up to October 2009, there have been 27 closed-end funds in China implemented the transition. Now, only 27 closed-end funds remain in market. The influence of the implementation of Closed-to-open transition has emerged gradually. More and more people pay attention to the issue of expiration of the remaining funds.Because of the inherent shortcomings, such as "moral hazard" and "adverse selection", serious discount problems, the high transaction costs, the solution for the issue of the expiration of closed-end funds is very important for investors, fund management companies, and regulators. After the Law of the People’s Republic of China on Securities Investment Fund being passed, the main investors of closed-end funds, such as insurance companies, continue to promote the open-ending procedure. All of the maturating closed-end funds have been converted into open-end funds in ChinaIn the view of the theoretical and practical analysis, open-ending the closed-end funds has far-reaching impact.First of all, the closed-to-open transition will bring significant risks, including the redemption risk, liquidity risk, arbitrage risk and so on. If it lacks necessary regulations and laws to mitigate these risks, the funds will face the liquidation problems.Secondly, the open-ending procedure will eliminate or reduce the discount problems, the liquidity risk and then protect the investors’ interests. Otherwise, it creates arbitrage opportunities for investors.Thirdly, open-ending of closed-end funds will resolve the information asymmetry problem between investors and fund managers, which will improve the transparency and quality of information. This will make investors get information in time, and then enhance their supervision abilities, which will reduce the "moral hazard" and "adverse selection", and protect their interests.Finally, the closed-to-open transition can not only improve the supervision efficiency, but also provide the market with more money.This paper adopts the DEA approach to analyze the influence of the open-ending of closed-end funds on their performance. Compared to the traditional methods, the DEA approach has its own advantages. The traditional methods, such as Sharpe ratio, Treynor ratio, and Jensen a, are based on CAPM approach, which has many assumptions inconsistent with the reality. Besides, using different methods will get different results. Therefore, in order objectively and justly evaluate the fund performance, it is important to choose a good approach.The DEA approach has many advantages.Firstly, DEA model does not need to set the function between the input and output variables. The only assumptions that should be set are the convexity of production possibilities set (efficient frontier), invalidity and minimality.Secondly, DEA model measures the efficiency relative to the Pareto efficient frontier, which is the best performance the real operation can get. However, the parametric approaches estimate the efficiency relative to the market average performance.Finally, using the DEA model can not only find the inefficient funds, but also estimate the degree of the invalid, and gives an effective way to make the inefficiency to efficiency.This paper chooses 20 funds that finished the closed-to-open transition before December 31,2007 and 27 remaining closed-end funds as samples to do empirical analysis. In order to eliminate the influence of the declaration of open-ending of closed-end funds on the performance, the periods we choose are from January 1, 2005 to June 30,2006, and January 1,2008 to June 30,2009. This paper sets two groups for analysis:the first group compares the performance of closed-end funds and that after its reform; the second group compares the performance of funds that finished the transition and that of remaining closed-end funds. According to the results of the first group, we can see that the closed-to-open reform dosed not improve the performance significantly. According to the results of the second group, we can see that in the bull market the performance of the funds that finished the transition is better than that of the remaining funds, while in bear markets we get the opposite results. The empirical analysis shows that the closed-to-open transition is a better way to resolve the issue of the expiration of closed-end funds, especially in bull market.The results show that the closed-end funds play an important role in the securities’market, and that our country should continue to develop the closed-end funds. Regulators should enhance the supervision and provide legal protection. Fund management companies should strengthen their internal control system and improve the fund managers’abilities. Investors should improve their investment abilities.