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A „Free Lunch“ in Germany

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  • A „Free Lunch“ in Germany

    The New Germany Fund is a NYSE (Ticker-Symbol GF ISIN: US6444651060) listed closed-end fund (CEF) managed by Deutsche Asset Management. The two other CEFs managed by Deutsche Bank are (The) European Equity Fund NYSE Symbol: EEA (7.92$ / Discount to NAV 14.3%) and (The) Central European and Russia Fund CEE (23.15$ / Discount 12.8%)

    new germany fund

    With a recent price of 12.28$ and an NAV of 14.08$ the fund is trading with a discount of 12.8%. The benchmark of the Fund is 75% MDAX + 25% TecDax. To hedge the investment in GF you could short the MDAX and TecDax (use the respective Futures FMDAX /FTDX or the I-shares EXS3 /EXS2).

    An even better performance may be reached by shorting the notoriously underperforming ESTX50 Future or the I-shares EXW1 if you expect this European index lagging its German counterparts MDAX and TecDax. If your broker credits your account with the proceeds from shorting EXW1 you do not have to invest your own money.

    The hedge-ratio may be calculated as follows. Sell short 1.000 EXW1 @ 30.5€. The balance in your account will be 30.500 €. At an EUR/USD cross rate of 1.1475 you may invest up to USD 35.000 in GF (=2850 shares @ 12.28).

    As the NAV (14.08$) of your 2850 GF shares amounts to around 40.128$ you are participating in rising prices of your investment of around 34.970€ in German stocks (40.128$ / 1.1475) and have only 30.500€ at risk in European blue-chips (your investment in EXW1). You also may consider the lower volatility of the ESTX50 in your hedge ratio. FurtherAdjustments in the hedge ratio to express your market bias may improve the performance of your “hedged” position. Do not worry about the EUR.USD rate as you are on both sides invested in Euro.

    If you prefer to see the DAX touch 10.000 before considering investing in Germany no problem: Short the ESTX50 first and cover your short with a nice profit when your downside target is met and you invest in GF.

    But do not hesitate too long, as you may miss the most interesting aspect of holding a CEF with a high discount to NAV: You have a chance to influence the discount by acting as a shareholder activist making shareholder proposals if you have held shares in the value of more than 2.000 $ for more than one year.

    January 14 2019 is the deadline for shareholder proposals to be included in the invitations to the 2019 Annual General Meeting of GF to be held in June 2019… to be continued

    Disclosure I hold shares in GF, EEA and CEE and shorted EXW1 and the March 15 ESTX50 Future

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