Wednesday, March 19, 2008

Revisiting: Muni Bond Fund shorts

On February 20th, a HingeFire article urged investors to short several leveraged Muni Bond closed-end funds that hold significant amounts of low grade debt (see Auction Rate Stress Continues: Muni Bond Funds Impacted). These were viewed as low volatility, high probability short plays in the market. Three funds priced in the $13 to $14 range were pointed out as having a price downside of approximately a dollar over the upcoming weeks; MAF, VKQ, and VMO.

Now that a month has passed, let’s take a look at the results. The PIMCO Municipal Advantage Fund (MAF) dived from $13.14 on February 20th to close today at $12.17. The Van Kampen Muni Trust Fund (VKQ) was priced at $14.21 back in February and closed at $13.52 today. The Van Kampen Muni Opp Fund (VMO) crashed from $14.37 to close at $13.14 today. The average drop over the past month for these three funds was 96 cents (minus the six cents in dividends on average paid out during the period). – right on target as per the prediction for approximately a dollar gain for shorts over several weeks.