Unit 17: Alternative Investments Flashcards
Direct Participation Programs:
Allow the economic consequences of a business to flow-through to investors.
A DPP is just a different way to invest in a business rather than buying the company’s stock.
Because most DPPs are privately placed,
they are considered illiquid, and investors must commit money for a long time. Even those which are publicly traded do not have the liquidity of other investments.
Any income received by a partner is considered:
passive and the same is true for losses. The effect of this is that any passive losses can only be deducted as a loss against passive income.
An investor should choose to invest in a specific limited partnership because:
- It is economically viable
- The investor can make use of the potential tax benefits
- The GPs has/have demonstrated management ability and expertise in running similar programs
- The program’s objectives match the investor’s objectives and do so within a time frame that meets the investor’s needs
- The start-up costs and projected revenues are in line with the start-up costs and revenues of similar ventures
A person seeking current taxable passive income should not invest in an oil and gas exploratory drilling program. Why not?
It may tax years before any income is generated.
General Partner (GP)
the active investors in a limited partnership and assume responsibility for all aspects of the partnership’s operations
- GP maintains a minimum 1% financial interest in the partnership
- Liability for the debts of the business falls upon the GP
Limited Partner (LP)
passive investors with no management or day-to-day decision-making responsibilities
Exchange-Traded Notes (ETNs) are registered under:
Securities Act of 1933
Exchange-Traded Notes (ETNs) are:
- Made as debt instruments
- Type of exchange-traded debt security offering a return linked to a market index or other benchmark rather than periodic interest payments
- Value is calculated and published at the end of each day by the ETN issuer
What are the risks of ETNs?
- Credit risk (they are unsecured debt obligations)
- Market risk
- Call, early redemption, and acceleration risk
- Conflicts of interest
Leveraged ETF
attempt to deliver a multiple of the return of the benchmark index they are designated to track
Inverse (Reverse) Funds
sometimes referred to as short funds, attempt to deliver returns that are opposite of the benchmark index they are tracking
FINRA warns investors that most leveraged and inverse ETFs
“reset” daily, meaning that they are designed to achieve their state objective on a daily basis..
In most cases, these would not be suitable investments for buy and hold investors or those with other than a very short time horizon.
Example: “The long-term expected value of your ETNs is 0.
When funds are traded on an exchange,
they are known as ETFs. If they are exchanged traded, they are priced by supply and demand, can be purchased on margin, and bought and sold throughout the trading day, like all exchange-traded products.
When funds are not exchange-traded,
they would be priced, purchased, and redeemed like all investment company shares.
