The discount phenomenon of closed-end funds is widespread and is called "the mystery of closed-end funds" by modern finance. Financial economists believe that the main reasons for the discount of closed-end funds may be:
(1) Agency cost, that is, new investors demand additional price discounts to compensate investment managers for their low business ability, low moral standards and high management fees;
(2) Potential tax burden, that is, the net value of the fund contains a large amount of undistributed profits, and new investors who need to pay income tax on these profits demand additional price discount compensation;
(3) The assets of the fund are illiquid, that is, the investment portfolio of the fund is mainly composed of illiquid assets, so the manager may not fully consider the accrued illiquid discount of these assets when calculating the net value of the fund;
(4) Investor sentiment, that is, when investors expect that the closed-end fund they invest in is more risky than the fund's portfolio, the price they are willing to pay will be lower than the fund's net value.
However, there are two points to be pointed out: the duration of closed-end funds in China does not exceed 15 years, while closed-end funds in the world are usually perpetual; The investment target of closed-end funds in China is listed securities in the secondary market, while closed-end funds in the world may invest in unlisted securities with poor liquidity.
It can be seen that the huge discount of closed-end funds in China is mainly determined by investor sentiment. The high discount rate caused by investors' blind abandonment means that China's closed-end funds hide huge investment value.