Hedge Funds and Asset-Backed Securities: Rapid Fire
Chapters in this video
- 0:00 Phantom income and the hedge fund tax trap
- 1:15 The two velvet ropes: accredited vs qualified purchaser
- 2:37 Fund of funds and the look-through rule
- 4:00 The deli slicer: securitization and tranching
- 4:41 CMO timing risk vs CDO credit risk
- 5:51 Agency guarantees do not cover prepayment risk
- 7:02 IO and PO strips on the interest rate seesaw
- 7:38 Rapid-fire exam recap
What this video covers
- Why hedge fund investors receive a Schedule K-1 instead of a 1099, and how phantom income creates a tax liability on reinvested gains never received in cash
- The accredited-investor exemption cap of 100 beneficial owners and the qualified-purchaser exemption expansion to up to 2,000 beneficial owners, including the $5 million individual investment threshold
- The "2 and 20" fee structure: 2% management fee on assets and 20% performance fee on profits above the high-water mark
- Why the look-through rule prevents a fund of funds from evading investor limits, and when a fund of funds must register under the Investment Company Act of 1940
- The defining distinction that collateralized mortgage obligations (CMOs) divide timing risk (prepayment and extension) while collateralized debt obligations (CDOs) divide credit risk
- Why the Planned Amortization Class (PAC) tranche carries the lowest risk and lowest yield, while the companion tranche absorbs prepayment volatility for the highest risk and highest yield
- How interest-only (IO) strips move opposite to typical bonds when rates rise, while principal-only (PO) strips act like typical bonds and gain value when rates fall
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