Private exchange funds funds

transferpricing

If a private exchange fund involves several investors holding the same stock,
How does this diversify a concentrated position for an individual?

NakedPuts2011

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.

liangfeng

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?

infinitybenzo

good summary darlia

One more point in Private Exchange Fund -
unrelated investor who purchases the same security.

Unforseen

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

liangfeng

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...

IAmNeil

This thread just made me even more confused. What are the differences between a public and private exchange fund?

NO EXCUSES

cityboy

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.

lcai

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!

cityboy

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.