Hedge Funds and Fund of Funds
Chapters in this video
- 0:00 Why hedge funds operate outside SEC investment company rules
- 0:55 The 100-owner accredited-investor exemption and look-through traps
- 1:56 The 2,000-owner qualified-purchaser exemption ($5M/$25M threshold)
- 2:54 Liquidity lock-ups: why Carla cannot withdraw on a random Wednesday
- 3:48 The 2 and 20 fee structure and high-water mark protection
- 5:15 Blind pools versus blank check companies (SPACs)
- 5:46 Fund of Funds: how Budget Bob gets in and why double fees crush returns
- 6:54 Schedule K1, phantom income, and the partnership tax trap
- 8:06 Rapid-fire exam recap
What this video covers
- The accredited-investor exemption (100 beneficial owners) versus the qualified-purchaser exemption (2,000 beneficial owners), and why look-through rules make the 100-owner limit a classic exam trap
- The liquidity differences between hedge funds and mutual funds: no daily redemption, lock-up provisions of 1-2 years, and restricted redemption windows
- The "2 and 20" fee structure: 2% management fee on assets under management (AUM) plus 20% performance fee, and how the high-water mark protects investors from paying fees on recovered losses
- The fund of funds (FOF) structure as the pathway for non-accredited investors to gain hedge fund exposure, and why double-layer fees are its primary disadvantage
- Blind pools versus blank check companies (special purpose acquisition companies, or SPACs): one trusts the manager's undisclosed strategy, the other has no operations and seeks a merger target within 24 months
- Why hedge funds issue Schedule K1s instead of Form 1099s, how partnership pass-through retains income character, and what phantom income means for taxable gains never received in cash
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