Fists are flying in the closed-end fund arena. Shareholder activists are demanding that fund sponsors eliminate persistent double-digit discounts or ailing performance.

Several activists have sued sponsors. Others have submitted proxy proposals to open-end funds, or suggested stock buybacks or tender offers. Still others want to see heads roll and are threatening to oust the management company or unseat fund board directors. Currently, more than one dozen funds are duking it out.

Case in point: Shareholder activist George Karpus, president of Karpus Investment Management in Pittsford, N.Y., holds a 16.28% stake in the Bull & Bear U.S. Government. Securities Fund. Bull & Bear now proposes transforming the fund into a rather aggressive balanced fund, a similar proposal the fund filed last year and then withdrew at Karpus insistence.

According to Karpus, the fund adviser knows his firm may not invest in balanced funds. If approved, hed be forced to sell his stake, eliminating the funds squeaky wheel.

Karpus has filed a shareholder proposal detailing what he claims is the funds horrible performance and calling for the removal of the funds manager. But its really more of a threat to force management to the negotiating table, Karpus says.

Institutional investors are instigating the fights. Phil Goldstein, chief of the Pleasantville, N.Y.-based hedge-fund firm Opportunity Partners, says the overall sentiment of closed-end investors has gone from apathy to empowerment. In early May, the SEC further empowered shareholders via a series of no-action letters. The SECs positions paved the way for shareholders to fire a management company--even if the funds board disapproved.

Some advisers like Piper Jaffray and T. Rowe Price have bowed to shareholder sentiment. Others have been unwilling to deal or have counter-sued. Emerging Mexico Fund sued Goldstein contending that he violated the rules for soliciting dissenting shareholder votes by taking his strong opinions to a publicly accessible Web site.

Closed-end sponsors are devising strategies to prevent further shareholder activism. Offensively, the France Growth Fund moved to eliminate its discount by agreeing to pay out at least 12% of its assets quarterly and reduce its management fees. In May, the First Australia Fund defensively proposed installing a supermajority vote requiring 75% of shareholders to approve major proposals, including open-ending. In another defensive move, most funds already have staggered terms for board members.

Gabelli Funds has issued preferred shares on two of its closed-ends. Though the adviser contends that preferred shares issued in the current low interest rate environment can benefit holders of both share classes, activists say the preferred shares are a ploy to stifle common stockholders. Preferred shareholders can elect two directors to the Gabelli Funds board, and they vote separately on major issues such as open-ending or merging, so a major proposal cannot move forward unless both classes of shareholders give approval.