If a private exchange fund involves several investors holding the same stock, How does this diversify a concentrated position for an individual?
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
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
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.
I think that is Public exchange fund Swanny.
So in a private exchange fund everyone is contributing the same holding?
Yeah, I think. Just like economy of scale thing to hedge and monetize the position.
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 remember a really terrible question about collars vs. exchange fund vs. completeness fund etc… the answer seems really underwhelming.
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.
That is Q2 from 2007 AM.
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!
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.
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
CFAI p. 199 seems to indicate only one stock holding unless I am reading it wrong.
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.
ok, got that part, but when do you recommend private vs. public if you’re only trying to diversify your concentrated position?
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…
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
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.