what is the difference between public exchange funds and private exchange funds that are used to diversify loww basis stocks? and what is a variable pre paid forward?
In a public exchange fund, the investors contribute large blocks of low-basis stocks from a variety of companies; in a private exchange fund, the investors contribute stock all from the same company.
A variable prepaid forward is an agreement to deliver an asset (in this case, the low-basis stock) at some time in the future at a price paid today.
Private exchange fund is newer and not commonly used in practice yet. Chances of it being on the test are slim.
A variable prepaid forward is effectively a loan. The lender takes a portion of the capital appreciation at expiration.
Other factors to consider:
Public Exchange funds: have to hold 20% of the portfolio in illiquid securities and have lock up periods of 7 years.
Private Exchange funds: do not have to hold illiquid securities and are also subject to lock up periods. They are generally seen as being very tax aggressive, ie near the threshold where avoidance meets evasion.
Either vehicle allows you to diversify one very large asset with low basis, but you are only deferring the tax liability.
Also, if you’re looking at pre-paid forwads or equity collars the IRS imposes stipulations on how much of the asset’s value you can completely hedge, generally 85%. There has to be some degree of risk otherwise it’s considered a constructive sale.
Thanks everyone! S2000 good to see you back in the l3 forum !
My pleasure.
I won’t abandon you until Friday, remember?
Also a Public Exchange fund is run by a fund manager. In a Private Exchange fund, my understanding is that you monetize your concentrated position to invest in other securities of your choice.
You can also borrow against both.
there is something about not getting any upside participation in one of these
Awesome i thought you wer egoing to be busy with the l1 and l2 candidates.
I am.
Believe me . . . I am!