Hedge Funds & DPPs
Private, lightly regulated vehicles: hedge funds pool accredited investors' money for flexible, often leveraged strategies with lock-up periods; direct participation programs (limited partnerships) pass income and losses straight through to investors.
The exam loves a suitability “tell”: a customer wanting liquidity, principal safety, or transparency is the wrong fit, because both vehicles tie money up and disclose little. Watch the framing — these are private placements, not registered offerings, and (unlike mutual funds) generally not openly advertised to the public. (Rule 506(c) does allow general solicitation, but only to verified accredited investors — the classic exam answer still leans on the no-advertising 506(b) path.) For a DPP, the high-yield trigger is flow-through gains, income, deductions, and losses landing on the limited partner’s own return, with loss capped at the amount invested.
The trap is conflating these with REITs, which pass through income, not losses — a frequent distractor. Don’t confuse the limited partner (passive, no management role) with the general partner (runs the business, unlimited liability). And liquidity risk is the shared theme: lock-ups and no secondary market make exiting painful. Hook: GP = Got Power; LP = Limited Power, Limited Loss.
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