Morgan Stanley’s China A-Share closed-end fund (NYSEArca: CAF) gets a lot of attention. But that doesn’t mean investors should buy it.

CAF popped onto my radar screen recently because Tom Lydon at ETF Trends highlighted the fund in this article. It gets called out in the Wall Street Journal from time to time as well, and we regularly receive questions from advisers who are interested in the product.

It’s the one closed-end-fund that even people who hate closed-end funds like. And it’s easy to see why.

CAF is just about the only investment product that lets U.S. investors tap into the domestic Chinese equity market. Most other funds, like the iShares FTSE/Xinhua China 25 (NYSEArca: FXI) or the SPDR S&P China ETF (NYSEArca: GXC), invest in China through either ADRs or so-called H-shares, the shares of Chinese companies that trade on the Hong Kong exchange. That’s because U.S. investors are effectively barred from participating in the domestic Chinese markets.

But CAF has an exemption, thanks to a special agreement between Morgan Stanley and the government of China. And so, the fund buys the shares of companies listed on China’s domestic Shanghai and Shenzhen stock markets, which are otherwise off limits to U.S. investors.

The marketing pitch is obvious: Invest in the real China.

But CAF comes with two problems that most investors (and most media articles) ignore.

First, like many closed-end funds, it’s plagued by premiums and discounts. As of yesterday, CAF was trading almost 5 percent over its net asset value. Investors should think twice before buying anything trading at a premium; it’s like giving money away.

And CAF comes with double trouble. In addition to the premium on the fund itself, the domestic Chinese market trades at a premium to what you might call “fair market value.”

There are about 35 companies that list shares on both the domestic Chinese markets and the Hong Kong markets. The shares are virtually identical, and represent the same stakes in the same companies.

But for the past few years, the domestic Chinese shares have traded at a sharp premium to the Hong Kong shares. Whether that’s because of a bubble mentality among Chinese investors or because Chinese investors have limited outlets for their capital is almost immaterial; the companies are overpriced by international, truly open-market standards.

Hang Seng Indexes publishes an index that tracks the premium or discount of these dual-listed companies. It’s ranged as high as 80 percent in the past. Currently, it’s only 13 percent: the domestic shares are valued 13 percent above Hong Kong-listed shares on average.

Maybe that will go higher or lower; who knows. But one thing’s for certain: Investors who buy into CAF are paying not just the 5 percent premium for the fund, but the 13 percent premium on the domestic Chinese markets. In other words, they’re “overpaying” by 19 percent (or, to be precise, 18.65 percent, since 1.13 * 1.05 = 1.1865).

That’s fine, as long as investors know what they’re doing. But that 19 percent premium could collapse or even reverse, turning into a discount. The risk is that you buy today when it’s overvalued, and then sell out when it’s undervalued.

In other words, you’re making a bet on the structure of the market, not on the market itself. You’re betting that U.S. investors will continue to want to buy the fund, bidding the shares up over their true net asset value. And you’re betting that domestic Chinese investors will remain exuberant, overpaying for their domestic markets.

Just for kicks, you’re paying Morgan Stanley 1.75 percent for the privilege.

There have been stretches when CAF has outperformed funds like GXC (my favored Chinese equity ETF), mostly when the China A-Share premium is on the rise. In January of this year, for instance, CAF outperformed GXC by more than 25 percent.

Maybe that will happen again. Maybe Chinese animal spirits will stir and domestic investors will bid shares back up to an 80 percent premium.

For my money, I’d rather buy a fund that trades at fair value and invests in a truly open capital market. Over the past year, that’s been a better bet, as GXC has outperformed CAF by more than 20 percent.

The Chinese A-Shares market will be more intriguing if and when Van Eck launches its proposed China A-Shares ETF (see article here.) That, at least, would eliminate the premium/discount problem with the fund itself.

But even an ETF would not get around the problem of the inflated domestic Chinese markets, which represent a bigger risk to investors.

In the end, the idea of investing in domestic China is interesting. But for investors, as opposed to speculators, the risks and uncertainty are high.