CEFs trace their origin to investment trusts organized in Great Britain during the 1860s. The objective was to raise money for investment in the British Empire's colonial possessions as well as to provide capital to the rapidly expanding railroads in the United States. Financed using bank leverage or the sale of debentures, their primary objective was income rather than capital appreciation.

CEFs gained popularity in the United States during the Roaring Twenties. Prior to the Crash of 1929, CEF assets topped $4.5 billion, a significant chunk of the stock market's total capitalization. But with the market excesses of that period came abuse and corruption, and CEFs weren't immune. The Investment Company Act of 1940 cleaned up the way funds operated, but CEFs remained tainted from the Crash and subsequent scandal. Eventually, they became overshadowed by the seemingly more transparent open-end mutual fund structure we're familiar with today.