lesson 5: other managed products

do REITS satisfy income

yes. REITs distribute 90% of income. REIT dividends are always taxed as ordinary income.

The pricing characteristics of REIT shares are most like those of shares of a_____

-closed end fund -REIT shares trade in the secondary market at a discount or premium to their NAV like closed end fund shares. Mutual fund shares like growth funds or money market funds are redeemed by the fund at their NAVs. DPPs do not generally trade; there is an extremely limited secondary market for investors who wish to sell their interests.

characteristics of limited partners

-contribute capital -limited liability -no management responsibility

if you own AND lend real estate, what is this called and what do you collect?

-hybrid REIT -own property and lend money--collect both rent payments, lease payments, AND interest from the loans we made

if you provide loans for REIT, what is it called and what do you collect?

-mortgage REIT -collect interest -we would lend money to builders and developers and other people who need money in connection with real estate, and that is how we generate our return

characteristics of mutual fund securities

-Investment vehicle that pools capital -To achieve an investment objective -Sell shares or units in an investment portfolio -Offered by and for state or local government -like mutual funds except issued by government and for government

characteristics of general partners

-active investors -run business on day-to-day basis -unlimited personal liability

what is the tax treatment of dividends paid by REIT?

-always ordinary income -as tax passthrough entities, REITs do not qualify for lower rates that apply on qualified common stock dividends

what is the main difference between an S-corp and a C-corp

-an S corp is a type of participation program with tax passthrough status. -in a C corp, income is taxed at the entity level and again at the shareholder level (double taxation)

Which of the following business structures do not pass through gains and losses to investors? A. Limited liability companies (LLCs) B. Limited partnerships C. C corporations D. S corporations

-c corp:the corporate structure that faces double taxation. the corporate entity gets taxed on profits it earns and then distributes those profits to its owners, the shareholderrs, who get taxed a second time when they recive dividends or realize capital gains. -C corp. the C corp are large corporation and the gains and losses can be retained by that corporate entity. in the S corp, the limited partnerships and the limited liability companies, both the gains and the losses are all distributed back to their investors.

what are the 3 requirements that REIT has to meet for specific taxation -has to meet all 3

1. 75% of income must arise from real Estate 2. 75% of assets are in real estate 3. 90% of taxable income is distributed to shareholders

what are characteristics of MLPs?

1. exchange traded 2. partnership taxation 3. limited liability 4. investment objective 5. risks

private equity firm characteristics

1. long term investmnets 2. lack of liquidity 3. company may not be able to support debt 4. high minimum investments

what are REIT business activities?

1. own real estate 2. loans for real estate 3. own and lend

hedge fund characteristics

1. risky investment strategies (derivatives, commodities, distressed companies) 2. unregistered securities 3. lack of liquidity (lock up periods) 4. high minimus investmnets 5. high fees (2% AUM and 20% profit)

what are some disadvantages of DPP investments?

1. very limited secondary market--liquidity risk 2. changes in tax laws can significantly reduce value--legislative risk 3. can lose entire investment--capital risk

do REITs satisfy liquidity

yes. if you want to exit or reposition it is fairly easy to do so and you will be able to sell.

An entity engages in oil and gas drilling. Rather than paying income tax at the entity level, it flows through the tax consequences to its investors. It is a

A direct participation program (DPP) is characterized by the flow-through of tax consequences to investors. It may participate in oil & gas, real estate, agriculture and other types of activities.

In the event of a dissolution of a limited partnership, what is the priority of claims? A. Secured lenders, general creditors, limited partners, general partners B. Secured lenders, general partners, limited partners, general creditors C. General partners, limited partners, secured lenders, general creditors D. General partners, secured lenders, general creditors, limited partners

A. Secured lenders, general creditors, limited partners, general partners

To avoid double taxation on dividends paid to shareholders, REITs must invest what portion of their total assets in real estate?

At least 75%

A hedge fund in which the fund manager is given complete authority to decide on the assets in which to invest is a ___

Blind pool fund -In a blind pool hedge fund, there is not disclosure of the investments that will be made.

In a limited partnership a limited partner is permitted to engage in all of the following activities EXCEPT

Borrowing money from the partnership -Neither a limited nor a general partner are permitted to borrow money from the partnership.

what are direct participation programs (DPPS)

Business structure that offers flow-through tax treatment by passing income, gains, losses, deductions, and credits directly to investors -No corporate-level taxation (pass-through) -Passive losses offset passive gains (but not other gains) -basically investing in a small business

To limit downside exposure and generate income, structured products often rely on which of the following? A. value investing B. international investment opportunities C. high participation rates D. options strategies

C. high participation rates -Downside protection and income is generated for structured products through the use of derivative investments and options strategies.

All of the following are typical trading practices of hedge funds EXCEPT: A. concentration in tangible invetsments B. undisclosed investments made with fund capital C. high degree of leverage D. short securities positions

Concentration in tangible investments

which of the following is true regarding a raw land limited partnership? A.It offers depletion tax benefits. B.It offers depreciation tax benefits. C.It offers regular income. D.It offers appreciation potential.

D.It offers appreciation potential. you are investing in raw undeveloped land (no buildings, homes, etc.) if there is nothign on it, there is no deplecion, if there are no assets, there is no depreciation. no income ocming in because there is no one on it. the value of land COULD appreciate

what are 2 investments that generate passive income

DPPs and REITs

A recommendation for a purchase of an interest in a non-traded public REIT would be most appropriate for an investor who______

Has a long-term time horizon and does not need liquidity -A non-traded REIT, although offered to the public, is not generally liquid. It is most suitable for someone who has a long-term investment time horizon because funds are usually tied up for a lengthy period.

what are hedge funds

Hedge Funds are investment vehicles with flexible investment strategiesfor financially sophisticated investors.

All of the statements regarding the trading strategies of hedge funds are true except: A. lock up periods allow hedge fund managers to invest in illiquid investments without concern for customer withdrawal requests B. tangible assets are frequently used as investment alternatives within hedge funds C. hedge funds are limited in the amount of. leverage they can employ in accomplishing their investment objectives D. both short and long periods are heavily used to attempt to produce high returns for investors

Hedge funds are limited in the amount of leverage they can employ in accomplishing their investment objectives -The amount of leverage or other trading strategies employed are often left to the discretion of the hedge fund manager.

Which of the following investment opportunities offer a flow through of losses to investors? I. Closed end funds II. Direct participation programs III. Hedge funds IV. ETFs

II and III

The frequent trading of securities within hedge funds may subject investors to___

Increased short-term capital gains Frequent trading by hedge fund managers can subject investors to increased short-term capital gains which can be costly because of the higher tax rate that applies to these distributions.

where can REIT shares be purchased?

OTC or on stock exchange

When evaluating the investment potential of a limited partnership, an investor should be most concerned with the _______

Overall economic viability of the partnership -The most important factor in choosing a direct participation or limited partnership investment is its economic potential, not its tax benefits or loss pass throughs.

what are private equity firms

Private equity firms are investment vehicles that make direct investments to fully or partially buy existing companies. you would invest with a company that is going to make diredct investments to fully or partially buy existing companies. so rather than just buying a few shares or a sliver of a company, these are firms that go in and take over the whole shop or a large position that they might be able to excercise some control over it. when you are thinking about these, like hedgefunds, thinking about sophisticated investors who are able to tolerate the long term investment horizon, a lack of liquidity (you cannot get out. these are private companies that you own and there is no market for their shares), and the company also typically gets pretty levered up and they may not be able to support the debt so the chance of bankruptcy goes up. there are also typically high minimum investmnets

All of the following statements describing REITs are true EXCEPT A. Public REITs are first offered to the market through IPO B. shares trade in the secondary market at a discount or premium to their net asset value C. they generally invest in residential real estate only D. they offer ownership in a pool of assets much like a mutual fund

REITS generally invest their assets in commercial real estate, but also hold residential real estate mortgages. The ownership interest held by an investor reflects a share in all properties held by the fund much like ownership of mutual fund shares. REIT shares trade in the secondary market at a premium or discount to their NAV. REITs raise capital through an initial public offering.

All of the following are investment benefits of real estate investment trust (REITs) EXCEPT: A. avoidance of double taxation on dividends B. attractive dividends C. ability to pass through losses for investment tax deductions D. diversification among real estate properties, through a single investment

REITs offer diversification, attractive dividends and avoidance of double taxation on dividends. However, REITs can not pass through tax losses to investors.

Investors in REITs can expect all of the following EXCEPT A. liquidity B. participation in real estate investments C. Dividends distributions D. redemption at NAV

Redemption at NAV -REITs trade in the secondary market at a premium or discount to their NAV. Investors sell their shares to other investors to through exchange transactions; REITs do not redeem their shares.

a type of corporation that functions as a direct participation probram, with a passthrough of income and losses:

S-corp. there is no tax at the corporate level, as in a C corp

All of the following are true of both mutual funds and REITS EXCEPT A. a secondary market trading offers liquidity to investors B. prospectus must be made available to potential purchasers C. investors own a proportionate share of diverse assets that is professionally managed on their behald D. both have board of directors to establish their strategic action

Secondary market trading offers liquidity to investors Mutual fund shares do not trade on the secondary market. They are redeemed by the fund. There are both publicly traded, and private, but non-traded REITS.

all of the following are true about structured products except: A. they often are based on derivative options or option strategies for producing income and providing downside protection B. they offer high degree of liquidity C. they must be sold without offering document for investor disclosure D.. they can offer retail investors exposure to hard to access asset classes

They offer a high degree of liquidity Structured products typically do not trade after they are issued. There is generally a significant discount when they are sold before their maturity.

a typical hedge fund fee structure is called 2-and-20. this refers to:

a 2% management fee (based on assets). and a 20% incentive allocation (performance-based fee) based on portfolio gains. hedge funds general charge higher fees than most other investmnets

what is a direct participation program (DPP)

a business entity, such as a limited partnership, that passes through all gains and losses to its investors

what is performance fee

a fee charged by hedge funds that compensates the manager based on the increase in funds. this fee is typically about 20% of the profits which helps to attract the best managers, but can also eat into investment returns

lock up period

a hedge fund provision that prohibits investors from making a withdrawal from the fund for a certain period of time -this creates illiquidity for investors, as their assets are stuck in the fund during the period

exchange traded note (ETN)

a structured product that combines an unsecured debt instrument with equity-market upside. -generally, these securities re principal protected, meaning that unless the issuer defaults, the investor will receive her investment back at maturity -in addition to return of principal. the investors payout will also be based on the return of underlying equity security or market that that investment is tied to. -EXTREMELY illiquid

what are limited parnerships

a type of direct participation program that included general partners who actively manage the business and limited parents who contribute capital, but are not involved in the daily operations of the business. -these programs pass through gains and losses to investors

what are master limited partnerships (MLPs)

a type of limited partnership that can be publicly traded on exchanges -because they are exchange traded, MLPs are more liquid than other direct participation program investments and thus are appropriate for wide range of investors

what is a type of REIT that owns and operates income producing real estate

an equity REIT

structured products

an investment product that produces a return based on the performance of one or more underlying securities or markets -ex: ETN

the goal of raw land limited partnership is to generate:

capital appreciation over time by selling land at profit

what are real estate investment trusts? (REITS)

companies that manage portfolios of real estate investments (technically a trust)

a tax deduction that represents the reduction in value of natural resources, such as oil or gas due to production and usage is:

depletion -only applies to natural resources such as oil, gas, timber -real estate CANNOT be depleted

do ETNs face credit risk?

f you buy an exchange traded note from a broker dealer, you DO have credit risk and that is based on the credit quality of the issuing broker dealer. that bond element that you see above is a bond or a promise to repay you that your broker makes.

what is different with REIT taxation

f you do all 3 of these, the benefit to you as the REIT and all of your shareholders: only the shareholder is taxed on the dividends that are recieved. AKA, there is no corporate income tax

true or false: REITs are direct partnership programs (DPPS)

false. they are structured differently

true or false: REITS pass through gains and losses to investors

false. they only pass through the gains, not the losses.

true of false: REITs are investment companies

false: we are in the other managed product section. not the investment company section. REITS are formally NOT investment companies

private equity

focuses on investing in private companies that are typically underperforming/ -goal: improve the prospects of the business an then have some sort of exit strategy, such as a company sale, to generate a return for investors

what are MLPs investment objectives?

income -there is going to be the production and passing through of significant dividends

what is the main advantage, for REIT, of qualifying for tax passthrough status on an annual basis

investors avoid double taxation on income and gains received. these are passed through directly to investors without tax at corporate level

of you own real estate, what is this called and what do you collect?

it is called equity REIT -we get returns by renting out that property and collecting rent and lease payments

what is the primary disadvantage of most limited partnership investments

lack of liquidity

what type of liability do MLPs face?

limited liability. -unit holders are not liable for MLP debts. (you get a unit in the MLP as opposed to a share) the most you can lose is the amount you invest

many DPPs are ____ partnerships

limited partnerships

what is the type of limited partnership that is exchange traded

master limited parternship

A business structure that offers limited liability and pass through benefits but is publicly traded is a

master limited partnership A master limited partnership (MLP) is a pass-through taxation entity, but has ownership divided into shares that can be publicly traded.

do REITS satisfy conservation principal

no

what is the advantage of pass-thoughts?

no taxation at corporate level. only the underlying parent pays taxed

are the "other managed products" created by the investment company act of 1940?

no.

are hedge funds typically suitable for retail investors?

not typically suitable for retail investors. so on SIE when we are talking about industry essentials, just knowing that and not selecting them as a suitable investment for most people is going to get you what you need to know.

what is a benefit of DPPs?

one of the benefits here is that there is no corporate level taxation. like we saw with REITS, there is an element of passing through the corporate entity without taxation.

MLP taxation

partnership taxation -it is a partnerhsip and we talked about how partnership offers that pass through status so you avoid corporate level taxation. the MLP gets that benefit.

unique tax advantage available to investors in limited partnerships

pass through of losses

passive losses in a DPP can only be used to offset:

passive gains

what are Master Limited Partnerships (MLPs)

primarily energy-related businesses (e.g., producing, processing, and transporting oil & gas).

a suite of bundled services offered to hedge funds and other large institutional investors by banks and wealth management firms is called:

prime brokerage. services typically include a consolidated trading platform, valuation, and investment research

what is the most speculative type of real estate limited partnerships invest in?

raw land

the income paid out by equity REITs is driven primarily by

rents received, along with any sales of appreciated property

do ETNs face liquidity risk?

yes. even though they may trade on exchanges, alot of the times there is not much demand for them. so if you try to get out of it, even trading on the exchange, you are going to have to take a discount.

what are structured products

securities created by broker-dealers that provide a return based on market prformance (equity index) and often limit downside exposure structude products are secutiries created by broker dealers to provide a specific kind of explosure to their clientel. a typical structured note or exchange traded note might be one that provides market exposure to get equity like returns with a downside pritection. the way that they do this, is for example, with an exchange traded note , wheer the broker dealer will issue the client a package that includes a bond, so you get principle protection because you lend the broker dealer 10000 and then they return the 1000 to you, AND a derivitive which is an S&P call option which is providing a market linked return with typically a participation rate so you dont get all of the upside.

municipal fund security scenario

so your town has excess tax returns. they are sitting on cash that they dont need to deploy for another 6 months. what do they do with it? they could just put it in a bank but then it might not earn any rturn and so municipalities can invest their money into these municipal fund securities to earn a return consistent with their investment objectives. maybe they need somethign very safe and short term but that is better than earning nothing.

what are exchange traded notes (ETNs)

structured products consisting of: -a bond--principle protection (return of par) --a derivative--market linked return (participation rate)

depreciation

tax deduction available to investments in real estate and equipment

REIT taxation

there are specific taxation of REITS for those that qualify and all of the REITS will aim to qualify

what are municipal fund securities

these securities create a vehicle that will pool capital from municipalities to achieve an investment objective by selling shares where units in a protfolio and it is offered by and offered to state and local governments. -ex: local government pools (LGIPs)

how are master limited partnerships (MLPs) traded

they are exchange-traded. -unlike limited partnerships which often have a lack of liquidity, when we talked about the direct participation programs we talked about small businesses and so you couldnt exit your psoition, but these you can

true or false: REITs are more liquid than direct real estate ownership

true: REITS often trade on exchanges, or even if they are trading over the counter, it is going to be much more liquid and much easily tranferrible than actual physical real estate

true or false: REIT owners hold an undivided interest in a pool of RE investments.

true: i buy shares in the trust, the trust in turn owns all of these different buildings, has made all of these different mortgages. i dont own a particular apartment building or condo or commercial building.

hedge fund

typically organized as a limited partnership, it is a professional managed investment vehicle available to high net worth individuals and institutions that uses aggressive trading strategies to generate outsized returns at the risk of heightened losses

what is the riskiest type of oil and gas limited partnerships?

wildcat exploration-drilling in fields previously unexplored -developmental drilling programs are less risky

is there limited liability for investors in DPPS?

yes

do REITs satisfy diversification?

yes. they give you diversification within real estate, in the sense that you do not have to buy a particular property. by buying a REIT you can get a wide range of exposure and REITS give you asset class diversification in the sense that real estate may not be correlated with equities for example.

what are risks associated with MLPs?

you have business or specific risk and you are basicall ybuying into a company here so you want to be aware, if that company has a hard time and suffers bad outcomes, that is going to obviously impact you