Chapter 5: Other Managed Products

Real Estate Investment Trust (REIT)

A pass-through investment vehicle that pools investor capital to invest in income-producing real estate or real-estate-related assets, allowing investors to receive proportionate distributions of income while benefiting from professional management, diversification, and potential liquidity when publicly traded.

Pass-Through Vehicle

An investment structure in which income, gains, and sometimes losses are passed directly to investors without being taxed at the entity level, allowing investors to pay taxes only at the individual level.

75% Asset Test

An IRS requirement for REIT qualification stating that at least 75% of the REIT’s total assets must be invested in real estate-related assets such as properties or mortgages.

75% Income Test

An IRS requirement for REIT qualification stating that at least 75% of the REIT’s gross income must come from real estate sources such as rental income or mortgage interest.

90% Distribution Test

An IRS requirement for REIT qualification stating that the REIT must distribute at least 90% of its taxable income to shareholders annually in the form of dividends in order to maintain pass-through tax status.

Net Asset Value (NAV)

The value of a REIT’s assets minus liabilities, which represents the intrinsic value of the REIT, though publicly traded REITs may trade above or below NAV based on market demand.

Publicly Traded REIT

A REIT that is registered with the SEC under the Securities Act of 1933, listed on a national securities exchange, and traded like a stock, offering higher liquidity and transparency than non-traded or private REITs.

Public Non-Traded REIT

A REIT that is registered with the SEC but not listed on an exchange, typically sold through broker-dealers, offering limited liquidity, long holding periods, and higher fees compared to publicly traded REITs.

Private REIT

A REIT that is not registered with the SEC and not exchange traded, sold through private placements to accredited or institutional investors, offering limited disclosure and low liquidity.

Equity REIT

A type of REIT that owns and operates income-producing real estate, generating revenue primarily from rental income and capital appreciation from property sales.

Mortgage REIT

A type of REIT that invests in mortgages or mortgage-backed securities and earns income primarily from interest on loans rather than rent.

Hybrid REIT

A REIT that combines both equity REIT and mortgage REIT strategies by owning real property while also investing in mortgage-related assets.

REIT Taxation

The tax treatment under which REITs avoid corporate-level taxation on distributed income if they meet IRS requirements, with investors paying taxes on dividends received, generally taxed as ordinary income.

REIT Suitability

The appropriateness of REITs for investors seeking income, diversification, and real estate exposure, while accepting risks related to real estate markets, interest rates, and economic conditions.

Direct Participation Program (DPP)

An investment vehicle that allows investors to directly participate in the cash flow, gains, and losses of a business venture, often structured as a limited partnership and designed to provide tax benefits and passive income.

Limited Partnership (LP)

A common structure for DPPs consisting of one or more general partners who manage the business and have unlimited liability, and limited partners who are passive investors with liability limited to their investment.

General Partner (GP)

The partner in a limited partnership who manages the operations, makes investment decisions, has fiduciary responsibility to the partnership, and assumes unlimited personal liability for partnership obligations.

Limited Partner

A passive investor in a limited partnership whose liability is limited to the amount invested and who does not participate in daily management but retains certain inspection and voting rights.

Blind Pool

A DPP in which the specific investments are not identified at the time investors commit capital, increasing uncertainty and making it difficult to evaluate potential risks and returns.

Passive Loss Limitation

A tax rule stating that losses generated by passive investments, such as DPPs, can generally only be used to offset passive income and not active income or capital gains.

Partnership Agreement

The legal document governing a limited partnership that outlines the rights, responsibilities, authority, profit distribution, and dissolution procedures for general and limited partners.

Dissolution of a Limited Partnership

The termination of a partnership at a predetermined date or event, during which assets are liquidated and obligations are settled according to the priority of claims.

Limited Partnership Liquidation Order

The order in which claims are paid upon dissolution of a limited partnership, starting with secured creditors, followed by unsecured creditors, limited partners, and finally general partners.

Depletion

A tax deduction available to DPP investors involved in natural resource ventures, allowing recovery of investment as the resource is extracted.

Depreciation

A tax deduction that allows investors to allocate the cost of tangible assets over their useful life, commonly used in real estate DPPs but not applicable to raw land.

Master Limited Partnership (MLP)

A publicly traded limited partnership that offers exchange liquidity, limited liability for investors, and pass-through taxation, commonly used in natural resource, real estate, and financial service industries.

Hedge Fund

A pooled investment vehicle typically structured as a limited partnership that employs aggressive investment strategies, including leverage and short selling, to seek absolute returns, generally restricted to sophisticated or high-net-worth investors.

Two and Twenty

A common hedge fund fee structure consisting of an annual management fee of approximately 2% of assets under management and a performance fee of 20% of investment profits.

Leverage

The use of borrowed funds or derivatives to amplify investment exposure, increasing both potential gains and potential losses.

Short Selling

An investment strategy in which securities are borrowed and sold with the intention of repurchasing them at a lower price, carrying theoretically unlimited risk if prices rise.

Lock-Up Period

A contractual period during which hedge fund investors are prohibited from withdrawing funds, designed to provide investment stability for the fund manager.

Prime Brokerage

A bundled service arrangement provided by financial institutions to hedge funds, including custody, financing, clearing, and reporting services.

Hedge Fund Regulation

The regulatory framework under which hedge funds are exempt from many provisions of the Investment Company Act of 1940 but are subject to anti-fraud rules, fiduciary duties, and SEC registration requirements under Dodd-Frank if assets exceed certain thresholds.

Private Equity

An investment strategy involving pooled capital used to acquire ownership stakes in private companies, often through buyouts, with the goal of improving operations and exiting at a higher valuation.

Private Equity Buyout

A strategy in which a private equity firm acquires a controlling interest in a company, restructures operations or management, and seeks to sell or take the company public for a profit.

Private Equity Manager

The entity responsible for sourcing deals, conducting due diligence, managing portfolio companies, and making exit decisions on behalf of investors.

Private Equity Risk

The high level of risk associated with private equity investments due to long holding periods, illiquidity, leverage, and the potential failure of portfolio companies.

Structured Product

A customized investment product whose return is linked to the performance of one or more underlying assets, indices, or securities, often using derivatives to create specific risk-return profiles.

Exchange-Traded Note (ETN)

An unsecured debt security issued by a financial institution whose return is linked to the performance of an underlying index or asset, carrying issuer credit risk and typically no periodic interest payments.

ETN Credit Risk

The risk that the issuer of an ETN may default, making the investor dependent on the issuer’s financial strength rather than ownership of underlying assets.

ETN vs ETF

A key distinction in which ETFs own underlying securities and typically have higher liquidity, while ETNs are unsecured debt obligations with maturity dates and issuer credit risk.

Municipal Fund Security

An equity interest in a pooled investment vehicle issued by a state or local government entity, similar to a mutual fund but regulated under municipal securities rules rather than federal investment company regulations.

Local Government Investment Pool (LGIP)

A municipal fund security created by state or local governments to pool public funds for investment, emphasizing safety, liquidity, and competitive returns.

LGIP Investment Objectives

The goals of most LGIPs, which typically prioritize capital preservation and liquidity, though some pools pursue higher returns with increased risk.

LGIP Regulation

The regulatory oversight of LGIPs by the Municipal Securities Rulemaking Board (MSRB), with exemptions from SEC registration and Investment Company Act of 1940 requirements.

LGIP Official Statement

The disclosure document provided to investors in an LGIP when marketed by a municipal securities dealer, outlining risks, fees, and investment policies.

LGIP Fees and Expenses

Costs associated with managing an LGIP, including management and administrative fees that are deducted from pool assets and reduce investor returns.