Mariana Bush nearly quit her job as a closed-end fund analyst in 1994.

Back then, short-term and long-term interest rates were rising and investors were feeling the effects of leverage gone bad, said Ms. Bush of Wachovia Securities, a unit of Wachovia Corp.

"I remember somebody yelling: 'Why is my insured municipal closed-end fund down 20%?' " she said. "It had nothing to do with the credit quality; it was all interest-rate risk, and leverage will exaggerate that."

This year's credit crisis has once again stress-tested closed-end funds. Experts said the turmoil is likely to change, but not kill off these investment vehicles.

Mariana Bush

Unlike open-end funds, closed-end funds issue a fixed number of shares in an initial public offering that trade like a stock. Depending on demand, shares may trade at a discount or a premium to the value of their underlying holdings.

Closed-end funds "may be a niche of the investing universe, but I don't think they're going to go away," said Dan Culloton, a senior mutual-fund analyst at Morningstar Inc.

In the coming year, the closed-end fund universe is expected to experience more mergers and, perhaps, some liquidations because of dwindling assets in some funds and more activism due to wide discounts. Whether any IPOs come along in the next year will depend on how quickly the economy recovers. In addition, some believe this year's troubles will bring new transparency to the market.

And some wonder whether the leverage solutions closed-end funds have created this year will prove as efficient as the preferred-share leverage they had relied on for years. Nuveen Investments appears to have been successful with the variable-rate-demand preferred shares that the firm has created as an alternative to auction-rate preferred shares, Ms. Bush said.

"Seeing what these [variable-rate-demand preferreds] have done, there does appear to be a way," she said. Nevertheless, firms "may need to wait for the credit crisis to calm down some, for liquidity to come back to do more of that," she said.

One shouldn't underestimate the creativity of the industry, said Brian Smith, a spokesman for the Closed-End Fund Association. " 'Leverage' is a dirty word now. It won't be forever," he said. "The opportunity to enhance return is going to be huge."

There are some 640 stock and bond closed-end funds with an estimated $200 billion in assets, down from $300 billion at the end of 2007, according to Thomas J. Herzfeld Advisors Inc., a Miami investment-advisory firm. That compares with 530 closed-end funds at the end of 2003.

Last year was a record for closed-end-fund launches, with 33 funds holding their initial public offerings, Herzfeld said.

But this year's credit crunch has curbed investor appetite. Most closed-end funds chronically trade at discounts, but the average closed-end fund discount hit a record level of 26% on Oct. 15, according to Herzfeld. Only two new funds have come to market this year, and no one expects to see launches soon.

The credit crunch has caused several problems for closed-end funds. The funds may raise a limited amount of capital through leverage, typically by selling preferred stock or commercial paper, making a rights offering or obtaining a loan.

Funds that had issued preferred shares ran into trouble in February when the auctions at which the shares had been sold for years froze. That left preferred investors with no way to sell. Some funds were forced to do some delevering, while others have slowly been working their way out of the fiasco, replacing preferred leverage with alternatives, such as securities with "put" features.

"Right now you don't see a lot of IPOs because they're trying to refinance the [auction-rate preferred shares]," said Cody Bartlett, managing director of investments at Karpus Investment Management, an investment adviser in Pittsford, N.Y. "Once fund companies are done refinancing their ARPS, they'll be able to IPO funds that utilize leverage."

The industry has redeemed or announced planned redemptions of about 45% of the $64 billion in auction-rate preferred shares that were outstanding in February, according to Herzfeld.

However, until the economic outlook improves, Mr. Bartlett said, "you're probably not going to see closed-end-fund IPOs." He expects to see "a more normal closed-end-fund market" return within two years.

Write to Daisy Maxey at daisy.maxey@dowjones.com