Hedge Funds and Fund of Funds
Chapters in this video
- 0:00 The two exemption layers: 100 beneficial owners and qualified purchasers
- 2:15 Blind pools versus blank check companies (SPACs)
- 3:00 Hedge fund mechanics: no daily NAV, lock-ups, and 2 and 20 fees
- 4:32 High-watermark provision and the zero-fee recovery
- 4:59 Complex strategies: leverage, short selling, and derivatives
- 5:26 Fund of funds: accessibility through layered fees
- 6:29 Taxation trap: Schedule K-1 and phantom income
- 7:20 Rapid-fire exam recap
What this video covers
- The two separate exemption layers: the Investment Company Act of 1940 exemption for the fund itself (100 beneficial owners or qualified purchasers), and the Regulation D private placement exemption for the securities offering
- Why accredited-investor requirements come from Regulation D, not from the 100-beneficial-owner exemption itself
- The exam trap of beneficial owners versus investors, and when look-through rules apply to entities investing in the fund
- How hedge funds differ from mutual funds on daily NAV, liquidity, lock-up periods, and redemption windows
- The 2 and 20 fee structure: 2% management fee on assets under management (AUM) plus 20% incentive fee on profits, and how the high-watermark provision prevents fees on recovery of prior losses
- Fund of funds mechanics: lower minimums and diversification versus layered fees, and why the fund of funds may be registered while underlying hedge funds remain exempt
- Why hedge fund investors receive Schedule K-1 partnership income instead of 1099-DIV, and how phantom income creates tax liability without cash distribution
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