SIE cheat sheetSection 2: Understanding Products & Risks (44%)
DPPs, LPs & Alternative Investments
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Direct Participation Programs (DPPs) / Limited Partnerships (LPs)
- Pass-through taxation — income/losses flow to partners
- General Partner (GP): manages, has UNLIMITED liability
- Limited Partner (LP): passive investor, liability limited to investment
- LP must NOT participate in management (or loses limited liability)
- HIGHLY illiquid — no secondary market, hard to sell
- Types: real estate, oil & gas, equipment leasing, agriculture
Oil & Gas DPP Types:
- Exploratory (wildcatting): highest risk, drilling new areas
- Developmental: moderate risk, drilling near proven reserves
- Income: lowest risk, buying producing wells
Hedge Funds
- For accredited investors only
- Use complex strategies: leverage, short selling, derivatives
- Less regulated than mutual funds
- Typically have lock-up periods (illiquid)
- Performance fees (e.g., "2 and 20" — 2% management + 20% of profits)
Private Equity
- Invest in private companies or take public companies private
- Very long lock-up periods (7-10 years)
- For institutional/accredited investors
- Venture capital is a type of private equity
Key facts to memorize
- GP: unlimited liability, manages the program
- LP: limited liability (to investment), no management role
- DPPs: pass-through taxation, highly illiquid
- Oil & gas: exploratory (highest risk) to income (lowest risk)
- LP must not manage or they lose limited liability
Mnemonics that stick
- "GP = General runs it, unlimited liability; LP = Limited to investment, hands off management"
- "DPP = Direct PASS-through Programs (tax benefits flow through)"
- "Exploratory = risky Exploration; Income = safe Income from producing wells"
Exam traps
- If a limited partner participates in management, they LOSE their limited liability protection
- DPPs are HIGHLY illiquid — there is no active secondary market
- DPPs pass through losses which can offset other income (subject to passive activity rules)
- Hedge funds are NOT registered as investment companies under the Investment Company Act of 1940
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