If a private exchange fund involves several investors holding the same stock,
How does this diversify a concentrated position for an individual?作者: bpdulog 时间: 2011-7-13 13:54
it gives them all the ability to hedge or borrow money against in a bigger/more efficient way
lets say i only had 10 grand of a low basis stock, not much to do something with. but if i find 20 other people with 10 grand of the same one, our 200 grand can give us more flexibility to do a number of different hedging options/borrowings作者: dyga 时间: 2011-7-13 13:54
SPOILER for the 2007 AM Exam Q2, the provided answer for diversifying a concentrated position was either Equity collar or a Private Exchange Fund and not Public Exchange Fund. Any idea why if you've taken that exam?
More generally, from a diversification perspective why is one preferred over the other (Private vs public) that is.
Thanks作者: Valores 时间: 2011-7-13 13:54
Wait, what? I thought an exchange fund wasn't 20 people with the same holding, but 20 people with various concentrated holdings pooling their holdings into a more diversified fund.作者: lcai 时间: 2011-7-13 13:55
I think that is Public exchange fund Swanny.作者: bboo 时间: 2011-7-13 13:55
So in a private exchange fund everyone is contributing the same holding?作者: aidebaobao 时间: 2011-7-13 13:55
Yeah, I think. Just like economy of scale thing to hedge and monetize the position.作者: pennyless 时间: 2011-7-13 13:55
mwvt9 could you please comment on why the 2007 AM guideline answer is specific about Private Exchange Fund vs. Public Exchange if you have seen/done that question?
I am still not clear on why one is better than the other from a diversification perspective.
Thanks
Edited 1 time(s). Last edit at Monday, May 18, 2009 at 08:44PM by passthismofo.作者: IAmNeil 时间: 2011-7-13 13:55
i remember a really terrible question about collars vs. exchange fund vs. completeness fund etc...
the answer seems really underwhelming.作者: thommo77 时间: 2011-7-13 13:55
passthismofo Wrote:
-------------------------------------------------------
> mwvt9 could you please comment on why the 2007 AM
> guideline answer is specific about Private
> Exchange Fund vs. Public Exchange if you have
> seen/done that question?
>
> I am still not clear on why one is better than the
> other from a diversification perspective.
>
> Thanks
I haven't taken this exam, so I can't comment.作者: skycfa 时间: 2011-7-13 13:55
That is Q2 from 2007 AM.作者: Windjam 时间: 2011-7-13 13:55
Black Swan Wrote:
-------------------------------------------------------
> Wait, what? I thought an exchange fund wasn't 20
> people with the same holding, but 20 people with
> various concentrated holdings pooling their
> holdings into a more diversified fund.
You are absolutely correct!作者: jmh530 时间: 2011-7-13 13:55
My understanding is that the difference between a private exchange fund and a public exchange fund isn't the type of investments but simply the manner in which they are organized.作者: strikethree 时间: 2011-7-13 13:55
Black Swan Wrote:
-------------------------------------------------------
> My understanding is that the difference between a
> private exchange fund and a public exchange fund
> isn't the type of investments but simply the
> manner in which they are organized.
Yes, that was my understanding as well. I.e. Public can not change investments once contributed to exchange fund while Private you can subsitute investments, etc. but that answer from CFAI, just got me all confused -- we don't need that kind of confusion right now作者: susana 时间: 2011-7-13 13:55
CFAI p. 199 seems to indicate only one stock holding unless I am reading it wrong.作者: mp3bu 时间: 2011-7-13 13:55
Yeah, I just checked the book, mwvt9 was right. Should have known better than to hate on the champ. It says it can be a collection of different securities, but is typically the same security.作者: Zestt 时间: 2011-7-13 13:55
ok, got that part, but when do you recommend private vs. public if you're only trying to diversify your concentrated position?作者: mik82 时间: 2011-7-13 13:55
that's bcoz in private funds you have options to use hedging techniques i guess plus u can always adjust your holdings either increase or decrease and are not required to hold illiquid assets..作者: PalacioHill 时间: 2011-7-13 13:56
I think the key between private and public exchange funds is that private exchange funds are usually structured so that the investor retains some exposure to the potential upside in the stock holding, unlike public exchange funds where you have probably diversified it away. Dont know much more than that because CFAI wasnt really explicit there and didnt find anything when I googled it after taking the 2007 exam作者: cityboy 时间: 2011-7-13 13:56
sv102307 Wrote:
-------------------------------------------------------
> I think the key between private and public
> exchange funds is that private exchange funds are
> usually structured so that the investor retains
> some exposure to the potential upside in the stock
> holding, unlike public exchange funds where you
> have probably diversified it away. Dont know much
> more than that because CFAI wasnt really explicit
> there and didnt find anything when I googled it
> after taking the 2007 exam
sv and bdeora, thanks -- your answers make a lot of sense. This was confusing the heck out of me and given it was asked in 2007, not knowing was killing me.作者: lcai 时间: 2011-7-13 13:56
But to be clear here the real differentiator is how a private fund is organized and additional investment freedoms they provide and not a "single security" vs. "diverse securities" - which I still dont fully understand why you would establish a private completion fund composed of the same security - simply not the most direct route to diversify with and there are limits to what you can do through derivatives!作者: cityboy 时间: 2011-7-13 13:56
Exchange funds are organized in such a way that it exchanges funds between investors. So if there are 10 investors each have concentrated stocks, there will be fund created with all of them and have distributed amongst them. For Private Exchange, if a mutual fund is having stock where one investor's portfolio is concentrated, mutual fund will exchange that stock for the investor by mutual fund(same) and will make it more diversify. However this strategy will be possible when the stock is part of the mutual fund. While exchange fund is possible for any investor as they are creating their own fund.作者: IAmNeil 时间: 2011-7-13 13:56
This thread just made me even more confused. What are the differences between a public and private exchange fund?
NO EXCUSES作者: liangfeng 时间: 2011-7-13 13:56
it allows for more cost effective hedging techniques like OTC zero cost collars that you could structure with a trading desk... they have minimums for these types of transactions, so if you comingle your stock with your partners, you will be able to use derivatives to hedge more cost effectively...作者: Unforseen 时间: 2011-7-13 13:56
private:
same security
has to be unrelated parties holding the same security
not required to hold illiquid stock
limited partnership structure
can borrow to monetize
partners can chnage compositions
public
must hold 20% or greater in illiquid assets
manager controls assets
no chnage after implemetnation
partners share each others gains or losses
ability to monetize
int he end holds diversified holdings作者: infinitybenzo 时间: 2011-7-13 13:56
good summary darlia
One more point in Private Exchange Fund -
unrelated investor who purchases the same security.作者: liangfeng 时间: 2011-7-13 13:56
One security? or many different types of low basis securities?
I am confused.
I thought there are many different types of securities, I mean company A, company B......then they pull together to diversify, because they diversify, thus sharing gain and loss together. At the end of the fund, they just pull their part and go home.
Am I correct?作者: NakedPuts2011 时间: 2011-7-13 13:56
2 keys points to remember:
1) No of securities - Public fund has investors with 'different' securities (eg. LNKD, TSLA)
Private fund has investors with 'same' (only 1) security (eg. LNKD)
2) Means of diversification -
Public funds diversify through pooling of different securities along with 20% exposure to other illiquid assets.
Private funds diversity through hedging, borrowing against hedged portfolio and then investing the proceeds into other securities.
