What is the point of a private exchange fund? If you pair up with another investor who has the same holdings as you anyway and you both try and diversify…why can’t you try and diversify without them?
I think the text has it wrong, otherwise as you say, it doesn’t make sense
Because in a private exchange fund, several investors pool their shareholdings together to make up a larger stake, which would allow you to invest in investments with minimum investment size thresholds (that you couldn’t access alone e.g. PE funds, HFs, etc.)
In private exchange funds, you get together with your golf mates or whoever who all have concentrated stock holdings in different companies. You pool together you’re assets and take a stake in the diversified pool.
^no, that is a public exchange fund. The private exchange fund members have to hold the SAME security and must have at least one “unrelated investor” entering into the partnership “with a vaild business purpose other than that of hedging the security”.
I was reading this today and wanted to post up to clarify it…looks like there is already an ongoing discussion. So, I am with Spongebob. i don’t understand what kind of a benefit private exchange fund actually brings. You pool yourself with people who have the same security and make sure they also have an outside investor who they bring. I don’t understand this. Plus, it talks about you hedging and shot selling and some other stuff. Why can’t I do that myself? And why is that so different from the hedging category given on the same page? This is some major BS…
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > ^no, that is a public exchange fund. The private > exchange fund members have to hold the SAME > security and must have at least one “unrelated > investor” entering into the partnership “with a > vaild business purpose other than that of hedging > the security”. Sorry this is wrong. You end up with the same holdings as everyone else because you have all pooled your assets to create a diverse fund, which you have a share of. Other than the obvious the reason why its advantageous is because you aren’t taxed on transfering the asset. Its called a private exchange fund rather than a public exchange fund because the securities that compose it are of illiquid private companies not publicly traded companies.
Public exchange fund: No choice over assets; 20% illiquid requirement; you cannot adjust contenet. 7yr min time frame Private exchange fund: Choice over asets. I might be waffling here, but Isn’t it that you’re forming a partnerhip (could be multiple partnerships running through the same ‘unrelated’ investor/investors). You thereby own a share of the holding, such that you can short portions of your base security holding without it counting as a constructive sale such that via reinvestment you end up with a diversified holding which you can adjust within the 7yr min time frame?
yep sounds right to me. hence you dont pay tax on transfer the asset.
chedges, I’m sorry, but you are not correct. I would suggest you and others read pages 276 & 277 of CFAI V2. Public Exchange Fund: min. 7 years 20% exposure illiquid investment partners bring different holdings to the table capital gain is deferred, but not eliminated during the first 7 years the portfoloi will reflect the combined performance of the originals stocks, together with the returns on the illiquid one At the end each partner may receive a proportional distribution of his/her shares of the fund, that distribution now comprising that partner’s proportional share of the fund (the stocks in the port. plus illiquid). The tax basis for the original holding carries over to your diverse distribution, so you’ve become more diverse, but not eliminated the cap. gains tax. Private Exchange Fund: “They usually involve a SINGLE security… The investor or investors join with an external party, who purchases the SAME stock at current market prices and partners with the original investor/investors.” The partnership then enters inot a series of partial hedging, borrowing and reinvesting transactions. These transactions are designed to provide the owners of the low-basis stock with the diversifictationthat they seek (hedging to avoid triggering constructive sale). No requirement to hold illiquid investments. Partners have the ability to choose their investments overtime, however you are retaining the original stock holding. The point is you are basically pledging your stock along with others to borrow and invest…the investments liquidity events would then be distributed to the partners (still retaining your original stock). You can also look on Schweser 292/293 V1
I am still confused with Private Exchange Funds. Anyone can explain in simple words? The last sentence actually from your post: “The point is you are basically pledging your stock along with others to borrow and invest…the investments liquidity events would then be distributed to the partners (still retaining your original stock)” So you pledge your stock as a collateral? Then, you borrow and invest in other stocks, to diversify your portfolio? After the specified time period, you would still retain your original stock? Not able to get how this works.
That is the basic idea, but these are partnership developed for each unique circumstance. The major difference between private/public is private uses margin to diversify so they don’t have to sell all or any of their original position…a usual circumstance might be the partners are seeking downside protection (i.e. diversification) prior to an IPO. The grouping of these holdings allow them access to borrowing, which might not be possible with each individual holder trying on their own…they can use this borrowing at their discretion to invest in assets resulting in diversifying the groups portfolio. Public funds do not usually have the ability to lever, so their diversification comes from the the the combination of the assets everyone brings to the table and the 20% illiquid investment. Think about it this way. A group of people start a business and things are going so well, that they expect to go public in 8 years. The founders bring their private shares of the companing an partner with the the external investor who buys in. Collectively you’re able to borrow money and invest it in assets that provide everyone some downside protection through diversification. This would be a Private Exchange Fund. A different group of guys all happen to have portfolios dominated by low basis concentrated holdings. Lets say one is heir to P&G family, another is a Johnson from J&J, another son of one of the founders of Intel, etc. Each one of them is at risk because they are heavily concentrated in 1 stock. They get together and form a partnership bringing some of their respective concentrative stocks to the table and 20% of the partnership needs to be an illiquid asset (this is the loophole they exploit that prevents the tax from being paid, but this is above the level of detail in the curriculum). The group has no say in what happens the next 7 years and the performance is essentially the collective returns of the individual holdings and the illiquid asset. At the conclusion of the fund the investors walk away with their respective sized piece of the whole pie…not just the ingredient (stock) that they brought to the table. So after 7 years they have diversified their holding, so it is a blend of what everyone else brought, but they didn’t eliminate their low cost basis…it carries over to their new blended holding - thus the tax is just deffered, not eliminated.
I have read the cfai text and it is confusing. I got claification from 7city tutor on this as well as googling it.
So Private Exchange Fund provides downside protection, how about Public Exchange Fund? Can both funds benefit from upside potential?