Unit 17 - Alternative Investments and Other Assets

Question 1

DPP

Answer 1

• Type of Alternative
• Typically a limited partnership
• Income and losses flow through to investors and considered passive (passive losses can only offset passive gains)
• An investment in a business, just like stock. GP is management of company and LPs are investors.
  (Ex: Oil and Gas, RELP, Movie Production Company)
• Can be a private placement (State Registration), AND/OR a public offering (SEC Registration)
  -Subscription Agreement is required

Question 2

*Types of Alternative Investments (4)

Answer 2

• Real Assets
• Hedge Funds
• Private Equity
• Structured Products

Question 3

Responsibility / Roles of a General Partner (5)

Answer 3

• Makes decisions that bind the partnership
• Buys and sells property for the partnership
• Manages the partnership property and money
• Supervises all aspects of the partnership’s business
• Maintains a minimum 1% financial interest in the partnership.
  (assume unlimited responsibility)

Question 4

Fiduciary Responsibility of GP. What can they NOT do. (4)

Answer 4

• Cannot compete with the partnership
• Cannot borrow from the partnership (but may lend)
• Commingle personal funds with partnership funds
• Do not take a distribution from profits until LPs have taken one.

Question 5

Limited Partner Responsibilities / Notes

Answer 5

• No management decisions or day to day
• Not held personally responsible for indebtedness (limited liability)
• If they act like a GP, they will lose their LP benefit and be treated as a GP for these purposes.

Question 6

Subscription Agreement

• Who signs
• What info does it contain
• What power does it grant

Answer 6

• Investor signs
• Includes info on Net Worth and Annual Income, and -POA appointing the GP as the agent of the partnership.
• GP verifies info

Question 7

*Alternative Investments (alts) tested on exam (5)

Answer 7

• ETNs (Exchange Traded Notes)
• Leveraged ETFs
• Inverse (Reverse) Funds
• Structured Products
• Structured Notes with Principal Protection

Question 8

ETN’s vs. ETFs

Answer 8

ETF registered as an investment company. ETN registered under securities act of 1933.
-ETN is a DEBT security providing a return linked to a market index. Also known as ELNS (equity linked note (misnomer))
-ETF is a company that buys and holds whatever the index has. ETN does not - sophisticated system.
ETN - issuer can control price by redeeming shares or issuing shares (can provide a conflict of interest)
Long term value of ETN is zero. Not a buy and hold.
-ETNs use closing value (end of day value) called “indicative value”

Question 9

How often does a Leveraged ETF reset?

That time frame would not make a Suitable investor?

Answer 9

Daily - meaning they are designed to achieve their goal on a daily basis. Short term investors is most suitable. Not suitable for long term investors.
- Leveraged and Inverse funds can be on an exchange. If they are, they’re known as ETFs.

Question 10

Characteristics of ETFs

Answer 10

Can be purchased on margin, bought and sold daily,

Question 11

Structured Products Notes

Answer 11

• Not liquid

- For buy and hold traders, not short-term investors

Question 12

*Primary Difference Between Viatical Settlement, and Life Settlement
(Most testable)

Answer 12

• The act of selling your settlement or benefit to a 3rd party is known as a Viatical or Life Settlement)
• Viatical Settlements apply to those with terminal illnesses and a life expectancy of 24 months or less, regardless of age. (Viators are those selling policies)
• Life Settlement applies to those, although generally 65 years old, are in decent health with a life expectancy of 2-10+ years. Involves selling it for more than the cash value (but less than the death benefit).
• Almost all Insurance policies can be sold

Question 13

Risks involved in Viatical Settlement

Answer 13

• No secondary market, so hard to find a fair valuation, and investor may over-pay.
• The longer the person lives past expectancy, the less return the investor gets (unexpectedly)
• Insurance company may not be able to honor claim (they likely will though…just a risk)
• The intangible moral issue knowing as soon as the insured dies, the larger the return.

Question 14

*DPP - Advantages(3) and **Disadvantages

Answer 14

Advantages:

• An investment managed by others
• Flow-through of income and certain expenses
• Limited Liability - Max loss is amount of investment

Disadvantages:

• Liquidity Risk - greatest disadvantage
• Legislative Risk - could lose tax advantages
• Risk of Audit - owning a DPP sig. increases change of Audit.
• Depreciation Recapture

Question 15

Benefits (5) And Risks(4) of Investing in Real Estate

Answer 15

Benefits:

• Historically a hedge against inflation
• Provides rental income, a portion which may be tax-advantaged due to depreciation and interest deductions.
• Offers high leverage (relatively small downpayment)
• Generally not correlated with stock market returns
• Section 1031 tax-free exchanges

Disadvantages:

• Lack of liquidity
• Money lost from renters not making payments
• High Leverage is a worse negative in a down market
• May not be suited to manage property and hiring someone eats into profits

Question 16

Benefits(3) and Risks(5) of Commodity Investing

Answer 16

Benefits:

• Potential Hedge Against Inflation - During inflationary periods, investors should keep pace or exceed inflation rate.
• Diversificaiton
• Potential Returns

Risks:

• Principal Risk
• Volatility
• Exposure to Foreign Markets - political, economic, currency risk.
• High Cost - bad buy/sell spread for small to average investor.
• Lack of Income - Never income with commodities. Only capital gains. No income ever from gold or silver.

Question 17

Commodities have high correlation with inflation rate

Answer 17

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