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Almost every investment trust quirk has provoked headlines during the ongoing instability. After all, “Investment trust share prices plummet” has not proved far from the truth in sectors such as private equity. More ominously, the panic-inducing “Investment trusts forced to renegotiate their gearing”still appears frequently above stories about the property sector, still one of the most highly leveraged.

But the market remains tough not just for closed-end funds, but investments as a whole. When retail multi-managers come to choose their holdings, they have no more bombed-out portfolios to avoid in the investment trust world than in its more conventional open-ended sister universe.

To be even fairer to investment trusts, some open-ended portfolios such as 130/30s are now geared, which means characteristics that once applied wholly to investment trusts now apply selectively to their open-ended kin. Ucits III allows portfolios to be leveraged up to 100 per cent over and above the money put in by investors. As managers extend 130/30 to 140/40 and 150/50, analysts are likely to raise more questions about their debts in the future.

At the moment, however, such problems are more closed-end in nature. And for investment trust managers, there are additional headaches to contend with. Keeping one eye on the net asset value and another on the share price arbitrageurs is not easy under normal circumstances. During the past six months, conditions have become so difficult that no less an investment trust manager than Franklin Templeton Investments’ Mark Mobius has questioned whether the industry can survive without regulatory reform.

But for buyers, the hit to discounts as well as NAV has often created better buying opportunities in the investment trust world than in open-ended equivalents. This is particularly true of the specialist areas, where multi-managers can exploit a short or longer-term theme in fields where open-ended portfolios are scarce.

James Calder, head of multi-manager at Baring Asset Management, uses investment trusts across his portfolios, although he concedes it is not by any means the “simple option”.

“As a market, the investment trust industry does have some issues," he explains. "The areas where it is growing are specialist. It’s not as if they’re offering a generalist MSCI World trust and getting that away.”

But as a Ucits III manager, Mr Calder cannot invest in many open-ended alternatives and therefore uses investment trusts for diversification as well as for performance. “It provides us with access to asset classes where an open-ended strategy is difficult, such as property and funds of hedge funds,” he says.

Investing in closed-end is a different game to open-ended – “With investment trusts, you’re buying share price, not NAV” – but Mr Calder says this has its advantages when a well-managed trust is on a big discount and expecting a rebound. “We’ll take a bit of it so we can get the double whammy of NAV uplift and discount narrowing,” he says.

Another factor that can pay dividends, Mr Calder points out, is the new d-word – not derivatives, but debt. He observes the majority of investment trusts now have more flexible debt arrangements that reduce their long-term commitments but allow them to gear themselves and benefit on the upside. “Most trusts have got rid of their structural debt and put in revolving bank credit,” he says.

The difficulty, according to Mr Calder, is getting in and out at the right time, as investment trusts can take up to a few weeks to trade. The process involves planning careful exit strategies and holding lengthy conversations with brokers. Sometimes, even in an esoteric strategy, he says it can be better to settle for an open-ended equivalent – an absolute return tracker instead of a fund of hedge funds, for instance.

Patrick Armstrong, co-head of the multi-asset group at Insight Investment, says he applies a similar strategy to property on his Ucits III retail portfolios. Often, he will use swaps on the IPD indices instead of going into investment trusts. But in more specialist areas, he will sometimes buy an investment trust and hold it for a while to mitigate any widening in the short-term discount.

In his retail funds, he invests in two listed property investment trusts to access real estate in Macau. Even if he were able to use open-ended property funds, he says, he would be unable to get similar exposure to the region. “It’s a wider universe. You’ve got a more eclectic mix of strategies because the regulations aren’t as stringent.”

But unlike with open-ended funds, Mr Armstrong says his returns depend on the same mantra: “Performance is a factor of supply and demand rather than NAV.” In the short term, this has proved a mixed blessing. “The NAVs of both of them are doing well, but one of them is down 50 per cent over the last year. We didn’t expect discounts to go this wide.” He says the aim is to stay in the trust until it hits its sell target, which involves a mixture of NAV performance and discount.

Although Mr Armstrong may not have found an appealing open-ended Macau portfolio, managers who abandon Ucits IIi have larger numbers of funds available to them. This is particularly true if they negotiate cheap deals on open-ended portfolios, as Andrew Yeadon, head of multi-manager at Schroder Investment Management, explains.

“It’s usually cheaper for us not to buy closed-end funds with all our rebates,” he says. “We won’t use them if we’re getting something we could get in an open-ended strategy.”

Earlier this year, Mr Yeadon converted his multi-manager funds to Nurs, which allows up to 20 per cent in open-ended alternatives such as property and funds of hedge funds. “Nurs does open up a few areas where there isn’t an investment trust with an appropriate strategy,” he says.

But he confirms he still intends to use investment trusts despite the shift to Nurs. “We’re interested in it for alternatives and less liquid strategies.” But investment trusts’ alternative attractions can still prove a double-edged sword. “There are some very good-quality investment trusts around. The downside is they can go to premiums and discounts.”

Although some multi-managers like Mr Yeadon and Mr Calder like to exploit those discounts – Mr Yeadon is keen on private equity at the moment – others are far more wary. Tony Lanning, head of multi-manager at Gartmore Investment Management, was an investment trust broker in a previous life and says he is aware of all the considerations surrounding closed-end trading and discounts. Despite this, he reserves investment trusts for medium to long-term plays.

“We will continue to use closed-end funds when we consider it to be something different or a strategic long-term holding,” he says. “But I would be very cautious about trying to trade in and out of investment trusts off the back of the premiums and discounts.”

Mr Lanning bought one of his top investment trust holdings, Thames River Multi-Hedge, on a C-share issue. It soon went to a premium to NAV. On a discount basis, many value investors would hold it with caution. But with a fund like Multi-Hedge that has emerged from awful conditions in the black, investors may feel like paying a premium for security rather than taking a geared discount and watching it gape even wider.

Nick Rice is chief reporter at Investment Adviser