Leverage in closed-end funds

Many CEFs borrow — through bank credit lines, reverse repurchase agreements, tender-option bonds, or by issuing preferred shares — and invest the proceeds alongside common shareholders' capital. If the assets earn more than the cost of borrowing, common shareholders keep the difference. If they earn less, or fall in value, the losses are concentrated on the common shares.

Reading a leverage percentage

The most common convention is leverage as a percentage of total managed assets (common net assets plus leverage). A fund with $700 million of common net assets and $300 million of borrowings has $1 billion of managed assets and is 30% leveraged on that basis. The same fund is 43% leveraged if you divide by common net assets instead. Both numbers are correct; comparing one fund's 30% with another fund's 43% without checking the denominator is not. Every leverage figure on this site names its denominator.

Costs and resets

Leverage has a cost — interest on borrowings or dividends on preferred shares — which appears in the fund's expense ratio when the fund reports it that way. Floating-rate financing resets with short-term rates; fixed-rate financing does not. Rising short-term rates in 2022–2023 compressed the earnings of many leveraged bond CEFs for exactly this reason.

Under the Investment Company Act, a fund must maintain asset coverage of at least 300% for debt and 200% for preferred shares. The asset-coverage figure, where a fund reports it, is shown on the Fees & Leverage tab.

Finally, “no borrowings” does not mean no leverage. Derivatives and certain structured investments create economic leverage that a balance-sheet borrowing figure will not capture.