Nuveen Investments and Interesting Statistical Projects

The Nuveen closed end funds and ETFs are investments vehicles that are directed at retail investors. Many of these investments have features such as monthly dividends that seem to naturally appeal to older investors who would like regular "income" from their investments and who may not strive for a nuanced understanding of the nature of that "income."

In fact, many of these funds are far from "pain vanilla" bond funds or stock funds.

For example, there are many "leveraged bond funds" where the fund issues preferred stock at razor thin margins to institutional investors and then invests those proceeds together with an equal quantity of proceeds from retail investors in a pool of reasonably normal fixed income securities.

All of these purchased securities are then pledged as collateral to the preferred stock holders.

There are several consequences:

  1. The institutional purchasers of preferred shares get a slightly above LIBOR rate for a very nicely secured note. It's just business.
  2. The retail purchasers of the common shares

Retail investors have bought (or have been sold) many many billions of dollars of these rather special "structured assets." It seems very unlikely that more than a small percentage of these purchasers really understand the nature of the assets.

Still, these CEFs and ETFs trade hour-per-hour, so they are indeed market priced.

The reason that these are of interest to us is that the market prices (and total returns) are likely to appear to be anomalous compared to other market assets.

All of your favorite time series properties can be expected to be at least a bit off compared to more cut-and-dried assets. Thus, ARIMA properties, GARCH properties, and everything else you can imaging are likely to be a at least a little different from the norm. Because of the strange monthly dividends, you may indeed even have (OMG!) weekly and monthly sesonalities (periodicities) in the returns --- very rare birds in financial assets.

The mere fact that these securities do not behave like most securities is reason enough to be interested in them. In particular, big moves in the stock or bond markets --- either up or down --- will not have the same impact on these secures that would be the norm.

This situation suggests many "trading games." There are literally hundreds of feasible games.

Still, almost all of these CEFs and ETFs are mostly thinly traded and almost all are hard (and expensive) to short. Thus, the games have their limitations.

In fact, there is not a great wad of "portable alpha" here, but, ironically, this is a good thing.

It suggests that the games are likely to persist, and it is the reason that I am willing to share the (modest but tidy) bounty.

Sources of Information