LOF funds, like ETF funds, can also be bought and sold in the secondary market, in the same way as ETF funds, and can also play arbitrage, which leads to many small partners being confused between LOF funds and ETF funds.
LOF is called listed open-ended fund. LOF is a fund variety of independent innovation in the Chinese market. The first LOF fund was established in August 2004 and is called the South Active Allocation Hybrid Fund. From the name, LOF fund is an ordinary open-end fund, but the name of such funds must be enclosed with brackets, in which LOF is written. If you don't see this sign, it is an ordinary open-end fund, and the bracket is LOF fund.
Why does LOF fund appear in China? Closed end funds were the first to emerge in China, and then open-end funds began to rise. LOF funds are the localized innovation products that combine the advantages of open-end funds and closed end funds. LOF fund is essentially an open-ended fund, but it can be traded in the secondary market or redeemed in the primary market. One fund can meet the needs of two investors at the same time, which is very similar to ETF fund. This has led many investors to have no idea of the difference between the two funds.
Although LOF funds and ETF funds are very similar, there are also differences. The main differences are as follows:
1. ETF funds are all index funds, while LOF funds can be either index funds or actively managed stock funds, hybrid funds, bond funds, etc., so LOF funds cover a wide range.
2. The arbitrage rules of LOF funds and ETF funds are completely different. The over-the-counter redemption of LOF funds is not as high as the threshold of ETF funds. We ordinary people can participate in investment and really make money.
So what is the arbitrage method of LOF fund? The arbitrage of LOF funds also needs a re custody mechanism to link the OTC market with the OTC market, which means that if the OTC funds want to trade on the market, they need to go through the re custody procedures for their shares and transfer them to the OTC market. In this case, the OTC LOF needs to go through the procedures before they want to trade on the OTC market, which seems to be troublesome, But we still have a simpler way to solve this problem. Instead of going through cross system custody transfer procedures, we can switch between on market and off market through the on market redemption function of securities companies. This is the most common way in LOF fund arbitrage.
LOF funds can be traded in two markets inside and outside the market at the same time, and there will be price difference between the two markets. When the price difference reaches a certain level, that is, after the transaction fees are deducted for arbitrage, there will be very obvious profits, which will generate arbitrage opportunities. Generally speaking, the subscription fee for LOF funds is 1.2% to 1.5%. If you apply for LOF in the primary market and then go to the secondary market to sell the premium arbitrage, as long as the market price is 1.51% higher than the net value of the fund, you will earn. Buy from the secondary market and then go to the primary market to redeem the discount arbitrage. As long as the net value of the fund is 0.51% higher than the in market price, you will earn.
