Chapter 11 - Alternative Products

REIT shares can/cannot be purchased on margin and sold short

can

limited partnerships are formed by filing a ________________________ with the ___________

certificate of limited partnership, state

Which of the following entities does not pass through both income and losses? a. A limited liability company (LLC) b. A limited partnership c. A Subchapter S Corporation d. A real estate investment trust (REIT)

d (A REIT is required to pass through a minimum of 90% of its income to its shareholders, but it is NOT permitted to pass through losses. LLCs, limited partnerships, and Subchapter S Corporations are all permitted to pass through both income and losses.)

own and operate income producing real estate

equity REITs

buying income producing real estate. existing cash flow but potential problematic tenant issues (e.g. long term leases)

existing DPP

combination of mortgage and equity REITs

hybrid REITs

liquidity of REITs that are unregistered, offered through a private placement

illiquid

a portion of income from limited partnerships is taxed as ___________________ (_________% is deductible)

ordinary income, 20

income flows through limited partnerships as __________________

passive income

the _______________ distributes interest in a DPP

syndicator

general partner must have at least _____% interest

1

if a sponsor conducts a public offering of securities, the max underwriting compensation is ________%

10

REITs are subject to registration requirements of the securities act of ___________

1933

there is no taxation on income from REITs if ______% of it is distributed

90

a __________ requires a customer to sign a statement attesting to her annual income and net worth

DPP

a company that manages a portfolio of real estate investments in order to earn profits for its shareholders

REITs

In a limited partnership, a general partner's minimum participation in profits and losses is: a. 1% b. 5% c. 10% d. 15%

a (According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status.)

the rights and obligations of limited and general partners are found in the:

agreement of limited partnership

RRs are/are not permitted to exercise discretion involving client investments in DPPs

are not

limited partnerships are/are not typically publicly traded

are not

An investment banking representative would require an authorized person of an institutional investor to sign which of the following documents to attest to, or determine, whether the institution has the status of an accredited investor? a. The private placement memorandum b. The subscription agreement c. The confidentiality agreement d. The engagement agreement

b (The subscription agreement is a sales contract for the sale of securities in a private placement. It sets forth the terms and conditions of the securities. The client, or an authorized person of an institutional investor, will sign the agreement attesting to the status of an accredited investor.)

combination of exploratory and developmental

balanced

The major disadvantage to a limited partner in a direct participation program (DPP) is: a. Lack of control b. Lack of liquidity c. Flow through of income and expense d. Limited liability

b (A limited partnership is a type of DPP. An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity meaning that the investor cannot easily sell his portion of ownership.)

invest in developing and financially troubled companies. formed as registered investment companies (closed-end) and they invest in both the equity and debt of typically non-public companies

business development companies

In a direct participation program, which party is the last to be paid in a liquidation? a. Secured creditor b. General creditor c. General partner d. Limited partner

c (For the dissolution of a direct participation program or limited partnership, the priority of claims on assets is secured creditors, then general creditors, then limited partners, and finally general partners.)

the filing of the _______________________________ starts the business or is considered to give the business life.

certificate of limited partnership

REITs are attractive for investors who are seeking:

current income

All of the following characteristics are TRUE of REITs, EXCEPT that they: a. Are not exempt from the Securities Act of 1933 b. Are not regulated investment companies c. Cannot pass losses through to the investors d. Are always exchange traded

d (REIT shares may be traded either OTC or on an exchange. REITs are non-exempt securities under the Securities Act of 1933. REITs are not regulated investment companies and cannot pass losses to the investors.)

drilling near an existing field, less risk than wildcatting

developmental

REITs do/do not pass through losses

do not

liquidity of a limited partnership

illiquid

purchase of existing wells, creates immediate cash flow. safest

income

hedge funds are not considered a register investment company under the ______________________________

investment advisors act of 1940

limited partnerships contribute __________

money

a disclosure document that serves the same purpose as a prospectus for private placements

offering memorandum

liquidity of REITs that are registered, but not exchange listed (not-traded)

often lack liquidity

offer shares of stock to a small group of shareholders, never go public, and never taxed

subchapter s corporations

subchapter s corporations offer shares to no more than ______ shareholders

100

_____% of distributed income from REITs is tax-deductible

20

a business venture that is designed to pass through both income and losses to investors

DPP

All of the following statements concerning hedge funds are TRUE, EXCEPT the funds: a. May engage in short selling b. Must register under the Investment Company Act of 1940 if offered to U.S. residents c. May borrow funds in an attempt to boost returns d. May concentrate assets in a few positions

b (Hedge funds are investments that resemble mutual funds, but are typically only offered to wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, the use of leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. These funds are not generally required to register with the SEC due to the accredited status of their investors.)

Real estate investment trusts (REITs) invest in all of the following, EXCEPT: a. Shopping centers b. Undeveloped land c. Golf courses d. Self-storage facilities

b (Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages. They are income-oriented investments and their profit is derived from both the rental income they receive as well as the difference between the interest they pay and the greater amount of interest they receive. Most REITs invest in income-producing real estate such as office buildings, hotels, golf courses, health care facilities, apartment buildings, storage families, theaters, shopping centers and malls. Undeveloped land would not generate income and, therefore, would not be part of a REIT investment.)

The maximum underwriting compensation for selling limited partnerships in public offerings is: a. 5% b. 10% c. 15% d. 20%

b (The maximum underwriting compensation for selling partnership units in a public offering is 10%. This is based on the gross dollar amount of the units sold. The 10% limit applies to all compensation, regardless of the source, if it is in connection with the offering.)

A real estate limited partnership that does not specify the actual properties to be purchased is known as a: a. Staged program b. Private placement c. Bind pool d. Section 8 housing program

c (If a real estate program's prospectus does not specify the actual properties to be purchased, it is known as a blind pool (or nonspecified property) program. An oil and gas program may also be considered a blind pool if the properties to be drilled are not specified in the prospectus.)

REIT distributions do/do not qualify for the dividend exclusion rule

do not

general partnerships contribute _____________

expertise

wildcatting, high risk high reward DPP

exploratory

fund which allocates money to hedge fund managers. generally suitable for wealthy investors, may place restrictions on withdrawing money

fund of hedge funds

if a limited partner lends money to the company, they are a _____________________ for the amount of the loan, and a limited partner for the amount of the investment

general creditor

investment generally for wealthy investors that uses exotic strategies involving derivatives, leverage, and selling short. typically investors are seeking over-sized performance that is often uncorrelated to the stock market

hedge funds

the fees and expenses of an interval fund tend to be ___________ than other closed end funds and mutual funds

higher

a type of closed end fund, shares are continuously offered, but don't trade in the secondary market at prices that are above or below their current NAV. investors are able to sell a portion of their shares back to the fund at preset intervals.

interval fund

liquidity of REITs that are registered, exchange listed, and publicly traded are

liquid

most BDCs trade on exchanges, providing ______________

liquidity

for public offerings, a _______________ is used as the disclosure document

prospectus

most risky DPP, not income producing

raw land DPP

speculation on land appreciation, no positive cash flow or depreciation

raw land DPP

A REIT is NOT used for a tax shelter because it does NOT: a. Allow flow-through of losses b. Allow flow-through of income c. Provide limited liability d. Offer income potential

a (A REIT allows the flow-through of income, but not losses. Shareholders have limited liability. While a REIT is similar in structure to a mutual fund, it is not defined as an investment company. Also, while it may invest in real estate properties, it is not considered to be a limited partnership. Partnerships can pass through losses.)

Which of the following statements is TRUE concerning a fund of hedge funds? a. A fund of hedge funds may charge a fee in addition to the fees charged by the hedge fund managers b. A fund of hedge funds must allocate assets to a minimum of 35 different hedge fund manager c. Since assets are diversified, the fund of hedge funds is suitable for all investors d. A fund of hedge funds must restrict hedge fund managers to investing only in securities listed on U.S. exchanges

a (A fund of hedge funds pools investors' money and allocates it to hedge fund managers. The fund of hedge funds may charge a fee in addition to the fee charged by the hedge fund managers. There is no requirement that it use a specific number of managers. Hedge fund managers are not limited to investing in securities listed on U.S. exchanges. They may use a broad range of investment strategies that include different asset classes, selling short, derivatives, and the use of leverage. A fund of hedge funds may not be suitable for all investors.)

As a group, limited partners may NOT: a. Sue the general partner b. Sell assets to pay creditors c. Vote to remove the general partner d. Inspect the partnership's books

b (Limited partners are not permitted to be involved in management and could not sell assets to pay a creditor (a management decision). They do have the right to inspect the books, as well as sue and/or remove the general partner.)

for private placements, securities qualify for an exemption from registration through _____________

reg. D

hedge funds are offered under ____________ exemption to _____________ investors

reg. D, accredited

liquidation order of a partnership: 1. ___________________ 2. __________________ 3. __________________ 4. ___________________

secured lender, general creditor, limited partner, general partner

if a sponsor conducts a public offering of securities, registration is required under the __________________

securities act of 1933

the __________________________ is the document through which an individual "applies" to become a limited partner

subscription agreement

A registered representative, when selling a limited partnership, is NOT required to: a. Certify that the customer is an institutional investor as defined by SRO rules b. Certify that she has disclosed that the investment has a lack of liquidity c. Make sure the customer has a net worth to sustain a total loss of the investment d. Make sure this type of limited partnership is suitable for the customer

a (A registered representative would be required to certify that she informed the customer of all relevant facts relating to the lack of marketability and liquidity of the limited partnership. In addition, after obtaining information about the customer's investment objectives, financial and tax status, other investments, and future financial needs, the RR must have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment, or has other liquid assets. The RR must certify that the customer is suitable, and is in a financial position to be investing in this limited partnership. There is no requirement to certify that the customer is an institutional investor. There is a difference between an accredited investor (having at least $1,000,000 net worth or $200,000 of annual income), which is defined under Regulation D, and an institutional investor (a financial institution or an account with at least $50,000,000 of invested assets), which is defined by FINRA.)

An investor is interested in selling 500 shares of her listed REIT. The sale will be handled in a manner that's similar to the: a. Liquidation of a stock on the NYSE b. Maturity of a DPP c. Liquidation of a hedge fund d. Liquidation of a private placement

a (A secondary market exists for real estate investment trusts (REITs). The vast majority of REITs trade on the NYSE with prices that are determined by the forces of supply and demand.)

Which TWO of the following are suitable for an aggressive investor who wants a non-traditional investment as well as access to his capital? i. A business development company ii. A hedge fund iii. A liquid alternative investment iv. A private equity fund a. I and III b. I and IV c. II and III d. II and IV

a (Both a business development company and a liquid alternative investment are non-traditional investments that are suitable for an aggressive investor. A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides an investor with access to his capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, as well as financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. The term alternative investments refers to non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. These strategies differ from simply buying, holding, and selling securities and are often referred to as a way to diversify a portfolio through the use of securities other than equities and bonds. These are the types of strategies are used by hedge funds and private equity funds. One of the disadvantages of both hedge funds and private equity funds is their lack of liquidly. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment.)

A registered representative (RR) has discretionary authority over a customer's account and has determined a limited partnership investment is suitable for the customer. In order to invest in the partnership, the RR may: a. Do so with the written approval from the customer b. Do so with verbal approval from the customer c. Do so based on having discretionary authority d. Do so if the principal considers the investment to be suitable

a (Due to the complex and risky nature of the investment, limited partnerships cannot be purchased in an account by a person who holds discretionary authority over the account. Instead, the customer's written approval must be obtained before making the investment.)

All of the following choices are disadvantages for a limited partner, EXCEPT: a. The conduit (flow-through) treatment for income and loss b. Lack of voting power c. Lack of liquidity d. Possible adverse changes in the Internal Revenue Code

a (Limited partnerships are not a liquid investment. Investors should have staying power if they are considering a purchase of a limited partnership interest. Another risk is changes in the Internal Revenue Code that may cause the tax benefits from the program to be invalid. Also, a limited partner has no voice (i.e., vote) in the operation of the program. A major advantage is that the partnership is not a taxable entity. All income and losses flow through to the partner for treatment on his own tax return.)

In a direct participation program, which of the following parties is subject to the MOST risk in a limited partnership? a. The general partner b. The limited partner c. the Internal Revenue Service d. The attorney who acts as a legal consultant to the limited partnership

a (The general partner has the most risk in a limited partnership. The general partner directs all management affairs of the partnership. He is responsible for all the liabilities of the partnership. The limited partner has no management capacity in the partnership. The limited partner's risk is his investment. Most direct participation programs are set up as limited partnerships, which provides for the flow-through of tax consequences and benefits to their investors (limited partners).)

Which of the following investments will permit a customer to purchase publicly traded shares of a company that is MOST similar to a private equity fund? a. An exchange-traded fund b. A business development company c. An exchange-traded note d. A real estate investment trust

b (A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.)

A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy? a. The LP is considered a limited partner for both the capital contribution and the loan b. The LP is considered a limited partner for the capital contribution and a creditor for the loan c. The LP is considered a creditor for the capital contribution and a limited partner for the loan d. The LP is considered a creditor for both the capital contribution and the loan

b (A limited partner who has committed capital may also extend a loan to the partnership. If the partnership declares bankruptcy, the LP will be considered a limited partner for the capital contribution and a creditor for the amount of the loan.)

The subscription agreement for a limited partnership does NOT specify: a. Suitability standards b. Priority provisions upon liquidation c. To whom the check must be made payable d. Who must sign the agreement

b (All sales for limited partnership interests are conditioned upon acceptance by the general partner. Typically, a limited partner is considered accepted into the program once the general partner signs the subscription agreement. The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he understands the ramifications of the investment. Priority provisions for liquidating a limited partnership are found in the Certificate of Limited Partnership.)

Concerning hedge funds, all of the following statements are TRUE, EXCEPT that the funds: a. May engage in short selling b. Must register under the '40 Act if they are offered to U.S. residents c. May borrow funds in an attempt to increase returns d. May concentrate assets into a few positions

b (Hedge funds are investments which resemble mutual funds; however, they are typically only offered to very wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, using leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. These funds are not generally required to register with the SEC due to the accredited status of their investors.)

A hedge fund is: a. A mutual fund designed for accredited investors b. A private investment fund designed for wealthy, sophisticated investors c. A type of private placement variable life insurance d. Another name for a balanced fund

b (Hedge funds are private investment pools designed for wealthy, sophisticated investors. Accredited investors include wealthy, sophisticated individuals but hedge funds are not mutual funds.)

A limited partner would be in jeopardy of losing her limited liability if the partner: a. Received a portion of the project's income and deductions b. Assisted in the decision of which properties to acquire c. Insisted on examining the partnership's financial records d. Made a loan to the partnership

b (Limited partners have the right to receive their portion of income and losses, examine books and records, and make loans to the partnership. If they get involved in the management of the program, such as deciding which properties to acquire, they could be considered general partners and lose their limited liability.)

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are suitable for the same investors as exchange-traded REITs

b (Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.)

Which TWO of the following statements are TRUE about real estate investment trusts (REITs)? i. They must distribute 90% of their earnings to shareholders ii. They may invest only in short-term construction loans iii. They must invest in mortgages and securities iv. Their profits are derived from the difference between the payments made on outstanding mortgages and the amount received in rental income a. I and II b. I and IV c. II and III d. II and IV

b (Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages. Their profit is derived from the rental income they receive as well as the difference between the interest they pay and the greater amount of interest they receive. In order to qualify for favorable tax treatment, REITs must pay 90% of their income to shareholders.)

A limited partner is considered accepted into a limited partnership when the: a. Limited partner submits a completed subscription agreement b. General partner signs and approves the subscription agreement c. Limited partner submits a check to the general partner d. General partner deposits the limited partner's check in the escrow account

b (The sale of a limited partnership interest is executed by means of a subscription agreement. It is signed by the limited partner, but is not final until the general partner signs the agreement which signifies the acceptance of the limited partner.)

When determining whether a customer is suitable to invest in a direct participation program, which of the following is NOT required? a. The customer is or will be in an appropriate financial position that will enable him to realize the tax benefits which are a significant aspect of the program. b. The customer is or will be in an appropriate financial position that will enable him to benefit from passive losses which are significant aspect of the program. c. The customer has a net worth that's sufficient to sustain the risks inherent in the program, including lack of liquidity. d. The customer has a net worth that's sufficient to sustain the risks inherent in the program, including the loss of investment.

b (When recommending a direct participation program, an RR must have reasonable grounds to believe that the investment is suitable on the basis of information that's been obtained from the customer, his investment objectives, other investments, financial situation and needs, and any other information that's known by the member or associated person. Through this information, the firm is confident that the customer is or will be in an appropriate financial position that will enable him to realize the tax benefits which are a significant aspect of the program, and that the customer has a net worth that's sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity. Additionally, the program must otherwise be suitable for the customer. There's no requirement that the client is or will be in an appropriate financial position that will enable him to benefit from passive losses.)

An investor in an equipment leasing DPP would NOT expect: a. Depreciation deductions b. Cost recovery c. Appreciation d. Consistent income from the lease

c (A DPP equipment leasing program purchases equipment and leases it to a user. The lease provides a consistent income. The limited partnership is permitted to depreciate the equipment. The equipment would not normally increase in value (i.e., appreciation).)

A business that is traded on an exchange, owns properties in its portfolio, and makes mortgage loans to developers is an example of a(n): a. Closed-end investment company b. Exchange-traded note c. Hybrid REIT d. Direct participation program

c (A real estate investment trust (REIT) that owns properties (e.g., office buildings) and also makes loans to real estate developers is a hybrid REIT. These business structures are a combination of an equity REIT and a mortgage REIT.)

A registered representative is required to certify which TWO of the following choices when a customer is purchasing a limited partnership? i. That the customer has been advised by an accountant ii. That the customer is in a financial position to be investing in this type of product iii. That the customer has a sufficient net worth to lose his entire investment iv. That the customer will not be investing in this type of product for a retirement account a. I and III b. I and IV c. II and III d. II and IV

c (A registered representative would be required to certify that she informed the customer of all relevant facts relating to the lack of marketability and liquidity of the limited partnership. In addition, after obtaining information about the customer's investment objectives, financial and tax status, other investments, and future financial needs, the RR must have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment, or has other liquid assets. The RR must certify that the customer is suitable, and is in a financial position to be investing in this limited partnership. There is no requirement to certify that the customer has been advised by an accountant or an attorney. A limited partnership is permitted to be sold to a retirement account.)

Which of the following direct participation programs has the highest profit potential? a. An oil and gas developmental program b. An equipment leasing program c. A wildcatting program d. A low-income housing program

c (A wildcatting program, also called an exploratory program, searches for oil in unproven areas. Although it is considered the riskiest type of oil and gas program due to the high rate of failure, if oil is found, it has the highest profit potential. This is due to the lower cost of acquiring the land. A development program drills for oil in proven, surveyed sites and the cost for the land is greater. Equipment leasing programs and low-income housing are designed to generate income and have the potential for tax benefits.)

Cash dividends received from which of the following securities will be taxed as ordinary income? a. Preferred stock issued by a bank b. Common stock issued by an oil company c. A real estate investment trust d. Convertible preferred stock issued by a software company

c (Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is not relevant to the tax status of the cash dividend.)

List from last to first the order of payments if a limited partnership declares bankruptcy. i. Secured creditors ii. General partners iii. Limited partners iv. General creditors a. I, II, III, IV b. IV, III, II, I c. II, III, IV, I d. I, IV, III, II

c (If a limited partnership declares bankruptcy, state law provides a priority for settling accounts. The order for settling accounts is secured creditors, general or unsecured creditors, limited partners, and last, general partners. Remember that this question is asking for the order from last to first.)

The main difference between a registered exchange-traded REIT and a registered nontraded REIT is: a. The type of assets in which they are permitted to invest b. The types of disclosures they are required to make to investors c. The amount of liquidity each of the securities has d. The tax treatment of each of the securities

c (Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. Many nontraded REITs may be redeemed only by selling the shares directly back to the REIT, subject to many limitations set by the REIT. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.)

Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income program? a. Liquidity b. Depreciation of equipment c. Depletion d. Depreciation of land

c (The most advantageous tax benefit that an investor will receive from an oil and gas program is the depletion deduction. These deductions normally last for as long as the program produces oil and gas. Depreciation of equipment lasts a limited number of years and land may not be depreciated.)

Which of the following statements concerning a fund of funds is TRUE? a. These products typically offer superior investment returns. b. These products typically offer lower-than-average expense ratios. c. These products are exempt from SEC registration. d. These products are designed to increase diversification.

d (A fund of funds is a fund that invests in a portfolio of hedge funds. These funds do not always offer superior investment returns, and they typically carry higher than average expense ratios. Although these funds are NOT classified as diversified investment companies under the Investment Company Act of 1940, they ARE subject to SEC registration. Funds of funds are typically used to increase diversification in a portfolio of stocks and bonds.)

Your client is considering purchasing a fund of hedge funds. Which of the following statements concerning this investment is TRUE? a. These securities may be purchased only by investors who meet accreditation standards established by the SEC. b. These securities may be redeemed at the conclusion of each trading day. c. These securities will outperform traditional mutual funds. d. These securities are not liquid investments.

d (A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although hedge funds are not required to register with the SEC, funds of hedge funds typically do not have this exemption available to them. Since these funds of funds are invested in illiquid securities (the individual hedge funds), they do not typically offer a guaranteed daily right of redemption. (Traditional mutual funds offer this feature.) Liquidity is a term that means an investor can convert her investment into cash quickly. Since there is no guaranteed daily redemption feature offered to investors in hedge funds and funds of hedge funds, these securities are illiquid. Choice (c) is incorrect since there is no guarantee that this type of fund will outperform a traditional mutual fund.)

All of the following actions create a conflict of interest for a general partner, EXCEPT if the general partner is: a. Accepting a payment not to compete with the program b. Holding partnership monies in his personal bank account c. Selling property that he owns to the partnership d. Lending money to the partnership at prevailing interest rates

d (A general partner is not permitted to compete with the limited partnership. Accepting a payment not to compete would be a conflict of interest. Selling property to the partnership is a definite violation of the conflict of interest provisions, as is commingling partnership funds. While partners are not allowed to borrow from the partnership, lending money to the partnership is permitted.)

interval funds offer limited ______________ and are suitable for _____________ investors

liquidity, long term

least amount of risk. no appreciation, beneficial potential tax credits, high maintenance costs

low income DPP

issues secured loans that are backed by real estate purchases

mortgage/ debt REITs

building hotels, offices, etc. risk of overbuilding, costs, overruns, long duration, ets.

new construction DPP