How to Invest in Cuba – Obama Warming to Cuba Travel?

by Darwin on August 17, 2010

How to Invest in Cuba will soon be a standard investor question once the press starts talking about how Obama’s going to open the flood gates for easing travel restrictions.  Presently, it’s illegal to even spend any money in Cuba, which essentially means an outright travel ban, but today there were some sources citing an easing stance toward Cuba from the administration.  The reality is that while it will take an act of Congress to formally change the US embargo stance toward Cuba, here’s why I bought shares in the aptly tickered CUBA The Herzfeld Caribbean Basin closed-end fund:

Net Asset Value Fluctuations

The interesting thing about closed end funds is that they don’t trade based on the value of their underlying holdings like ETFs, but rather, they trade at discounts and premiums to the underlying net asset value.  While CUBA is currently trading at a modest 6% premium, this premium has spiked substantially during prior news cycles.

In typical fashion, the press will start covering this more heavily, investors will clamor to jump on the next hot trend and possibly pile into this CEF again like they did in prior years when similar news items broke.  I am fully aware that the holdings in the fund are not actually direct holdings in Cuba, as that’s impossible – there are no publicly traded companies in the land of the dictator.  The fund’s objective is to capitalize on companies and industries that would benefit from easing Cuba restrictions, so it holds names like Western Union, Banco de Colombia, American Movil, Cemex, such that it looks much like a typical Latin America ETF.  Carnival and Royal Caribbean are in there as well since presumably, they’d benefit from new travel to the island.

Let me reiterate that this is not a direct plan on “how to invest in Cuba”, I’m simply making a near term trade that will exploit investor sentiment which can drive up the NAV of the closed-end fund to increase the premium based solely on the prospects of Cuba business growth in the region.  I don’t actually buy the fundamentals and if this rallies 10% in a week, I’ll dump it.  But often times, these plays work out, just like when I exploited a runup an ETN with this gold pairs trade and a dip in Apple shares just prior to an earnings bounce.  These market inefficiencies or herding opportunities can be easy money if you get ahead of them…or sometimes they’re complete duds.  Time will tell.

See more on closed-end funds and how to exploit NAV divergences.

{ 4 comments… read them below or add one }

Evan August 18, 2010 at 10:07 pm

I know it has nothing to do with your post, but what the hell is up with that embargo…does anyone really even remember? Is it cause its a communist country? So is china lol


Darwin August 18, 2010 at 10:16 pm

Hah! Before I was born. Missles pointed at us, killing dissidents and the like. But you’re correct, that’s plenty of countries around the world and right now we only have similar measures on Cuba and N Korea.

We tolerate it from China because they own us. Who else will buy our Treasuries to fund our debt and sell us cheap crap we don’t need?


Jack February 13, 2011 at 5:55 pm

what will cause theembargo to beremoved


Juan June 8, 2011 at 8:56 pm

Investing in Cuba??? WWWAUUU! that will be so nice! …but not for the investor but for the Cuban regime. Just imagine investing your hard earned dollar just to find out later on that your highly profitable investment was CONFISCATED by the Cuban governement for whatever reason like it happened in the early sixties to USA as well as to Spanish companies. Go ahead… invest if you don’t mind losing it all.


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