Limited Partnerships & Direct Participation Programs (DPP) are used interchangeably

ETFs Compared to Index Funds

• Both will distribute dividends, capital gains, etc…
  • Like S&P index fund will give you dividends from the companies that are in it
• ETFs are similar to closed-end funds
  • Though, closed-end funds are actively managed & ETFs are passively managed

Inverse & Leveraged ETFs

• Inverse ETF
  • Desired to perform in a manner that is inverse to the index it is tracking
    • If the index falls by 2% on the day, the ETF should rise by approximately 2%
    • Similar to short selling without unlimited risk
• Leveraged ETF
  • Constructed to deliver 2x or 3x the index it is tracking
    • May be leveraged inverse ETF
    • If the index rises by 1.5%, a 2x long ETF should rise by approximately 3%
• Leveraged Inverse ETF
  • A 2x, Leveraged inverse ETF, if market rises by 2%, your value will fall by 4%

The portfolios reset daily and, as a result, are designed for short-term trading; they take advantage of intraday swings in the index

• Have greater degree of risk 

Exchange-Traded Notes (ETNs)

• ETNs are structured products and are issued as unsecured debt. They trade on exchanges, have low fees, and provide access to challenging areas of the market 
• ETNs are linked to the performance of a market index or other benchmark
• Details:
  • Backed by only the full faith and credit of the issuer (credit risk)
  • Not principal protected, but return is linked to performance of an asset
  • May be purchased on margin, sold short, and traded on exchange
  • Issuer obligated to deliver performance at maturity
• You can also have leveraged/inverse ETNs

Matching

• Linked to the performance of a benchmark, but not principal protected
  • Exchange traded note
• Similar to an ETF, but its shares are forward prices (once per day)
  • Index fund
• Similar to an index fund, but its shares trade in the market and can be sold short
  • Exchange-traded fund
• Performs in a direction that’s opposite tis benchmark
  • Inverse ETF

Alternative Packaged Products

• Hedge Funds
  • Investment fund generally for wealthy investors
  • Not considered a registered investment company
  • Uses exotic strategies involving derivatives, leverage, and selling short
  • May place restrictions on investors withdrawing money (lack of liquidity)
  • Not required to publish NAV on a daily basis
• Private Equity and Venture Capital Funds
  • Similar to hedge funds in the method of raising capital through the sale of limited partnership units under the Regulation D exemption
  • Typically available to accredited investors only
  • Unregulated; limited trading opportunities

Real Estate Investment Trust (REIT)

• A company that manages a portfolio of real estate investments in order to earn profits for its shareholders
• Types of REITs
  • Mortgage/Debt: issue secured loans that are backed by real estate purchases
  • Equity: own and operate income-producing real estate
  • Hybrid: combination of mortgage and equity REITs
• Tax benefits
  • No taxation on income if 90% of it is distributed
    • Doesn’t pass through losses, but passes through income (unlike limited partnerships)
    • 20% of distributed income is tax-deductible
      • If you make $100 in dividends. 20% of $100 is $20. So, you only have to claim $80 in income
• Characteristics
  • Subject to registration of the Securities Act of 1933
  • Shares trade in the secondary market and are marginable
  • Distributions don’t qualify for the dividend exclusion rule
  • Attractive for investors seeking current income

Methods of Offering REITs

• Registered, exchange-listed, and publicly traded
  • Liquid
• Registered, but not exchange-listed (non-traded)
  • Often have a lack of liquidity
• Unregistered; offered through a private placement
  • Illiquid 

Advantages of Limited Partnerships

• A limited partnership is a business venture that’s designed to pass through both income and losses to investors
• Flow-through of income (no double taxation) and expenses
  • Income flows through as passive income
  • A portion is taxed as ordinary income (20% is deductible)
• Limited Liability
  • Limited partners are only liable for the amount invested and any loans assumed
  • (i.e., the amount they have at risk)

Disadvantages of Limited Partnerships

• Illiquidity
  • Typically not publicly traded
  • General partner’s approval may be required to sell
• Lack of control
  • Limited partner have limited voting power and no managerial authority
• Effects of Tax Law Changes
• Increased Tax Complexity 
• Calls to Contribute Additional Funds

General and Limited Partnerships

• General Partner
  • Day-to-day manager with unlimited personal liability
  • Must have at least a 1% interest
  • Fiduciary toward limited partner
  • Last at liquidation
    • Secured lender
    • General creditor
    • Limited
    • General
• Limited Partner
  • Passive investor with limited liability
  • Contributors of capital
  • Have certain rights:
    • Lend money to the partnerships, inspect books, and compete
  • Ways to endanger “limited” status: 
    • Negotiate contracts, hire/fire employees, or lend name

If you’re a limited partner and you contribute money. If a partnership goes bankrupt, What’s the order in which people are paid?

• If you lend money as a partner, it’s unsecured. For the loan, you’re a general credit. For the amount you invested, your a limited partner

When can a limited partner be in two categories?

• If they lend money to the partnership 

Offering Practices

• Public Offering
  • If a sponsor (GP) conducts a public offering of securities
    • Registration is required under the Securities Act of 1933
    • An underwriter is used to facilitate the offering
    • A prospectus is used as the disclosure document
• Private Placement
  • If a sponsor (GP) conducts a private placement of securities
    • Securities qualify for an exemption from registration through Reg. D

Real Estate Programs

• Riskiest to least riskiest from top to bottom ^^

Oil & Gas Programs

• Exploratory → balanced → developmental → income

DPPs (Direct Participation Programs) – Risk Summary

• Investors should be aware of the following risks of DPP investments
  • Management ability of the general partner(s)
  • Illiquid nature and potential loss of capital
  • Unpredictable income
  • Potential future mandatory assessments
  • Rising operating costs
  • Changes in tax laws and government regulations
  • Economic and environmental occurrences 

Investor Considerations

• Investor Certification
  • Registered representatives are required to certify they have informed their customers of all relevant facts and lack of marketability
  • Investor must have sufficient net worth and income to absorb a loss of the entire investment
• Discretionary Accounts
  • Registered representatives are not permitted to exercise discretion involving client investments in DPPs

Fill in the blank

• Limited partnerships pass through income and losses
• The general partner must invest no less than 1% in the partnership
• Limited partners do not have a fiduciary responsibility to the partnership
• Limited partnerships generally avoid registration by offering securities through private placements
• Raw land is considered the riskiest real estate program
• Overbuilding is a risk in a new construction limited partnership
• The riskiest oil and gas program is an exploratory program