Managing a closed-end investment fund - Given the discount paradox.

Closed-end investment funds tend to sell at a discount to the market value of their investment assets. The two primary measures of success are the ret urns earned by the fund's investors (before- and after-tax) and the extent of the fund's market value discount from the market value of the investment assets. It is frequently assumed that the smaller the discount, the more L ikely it is that the market approves of management's performance. This arti cle considers the implications to a fund's management of these two measures of success. While there are many different explanations for these discount s, the authors focus on two tax effects and the resulting paradox. One tax effect is the fund's unrealized capital gain and the implicit future tax li ability associated with it. The second tax effect is the value discount a t ax-aware potential investor requires if the fund will realize future capita l gains in a finite time period more rapidly than the investor would realiz e with a direct investment.