Pooled Investments

The whole unit on one sheet: the fund structures, how each one prices, and the traps the exam builds around them.

The One-Liners That Win Points

• The Investment Company Act of 1940 classifies three statutory types: management companies (open-end and closed-end), unit investment trusts (UITs), and face-amount certificates (obsolete).
• Open-end fund (mutual fund): continuously issues and redeems shares, no fixed share count, bought and redeemed directly with the fund, never trades on an exchange.
• Closed-end fund: fixed shares issued once, then trades on exchanges like stock; does NOT redeem shares.
• Unit investment trust (UIT): fixed, unmanaged portfolio with a termination date, supervised by a trustee (no board of directors), issues redeemable units, no management fee.
• Exchange-traded fund (ETF): legally structured as an open-end fund or UIT, but trades intraday on an exchange like stock; mostly passively tracks an index.
• Forward pricing: orders before the 4:00 PM Eastern close get that day's net asset value (NAV); orders after get the next day's.
• Open-end shares can NOT be bought on margin or sold short; closed-end funds and ETFs CAN.
• ETF shares are created and redeemed in-kind by an authorized participant (AP), which is why ETFs are more tax-efficient than mutual funds; AP arbitrage keeps price near NAV.

Numbers to Lock In

• Net asset value (NAV): (total assets minus total liabilities) divided by shares outstanding, calculated once daily after the 4:00 PM Eastern close.
• Public offering price (POP) for a mutual fund = NAV plus the sales charge; redemption is at NAV.
• Mutual funds must redeem shares within 7 calendar days.
• Diversified fund test (75/5/10): the diversification requirement under the Investment Company Act for classifying a fund diversified vs non-diversified.
• Hedge fund fee shorthand: 2 and 20 (roughly a 2% management fee plus a 20% performance fee).
• Private-fund investor limits: the small-investor exemption caps at 100 beneficial owners; the qualified-purchaser exemption has no cap.

Top Gotchas

• Open-end vs closed-end pricing is the top trap. Open-end funds always transact at NAV (plus any sales charge). If a fund trades at a premium or discount to NAV, it is NOT open-end; think closed-end (or, rarely, ETF).
• Closed-end funds commonly trade at a discount. A fund at 95% of NAV is closed-end, not a mutual fund.
• UIT vs fund: a UIT has a fixed portfolio, a termination date, a trustee instead of a board, and no management fee. No ongoing advisory decisions means no management fee, the key tell.
• ETFs are legally open-end funds or UITs but trade like stocks; do not call them closed-end just because they trade on an exchange.
• ETF premiums or discounts are tiny thanks to AP arbitrage; large, persistent ones point to a closed-end fund.
• Only authorized participants create or redeem ETF shares; retail investors just trade on the exchange.

One-Breath Recap

The Investment Company Act of 1940 defines management companies (open-end and closed-end funds), unit investment trusts, and obsolete face-amount certificates. Open-end mutual funds continuously issue and redeem shares directly with the fund, always at net asset value using forward pricing, and redeem within 7 days; they cannot be margined or shorted. Closed-end funds issue fixed shares that trade on an exchange at a premium or discount to net asset value and can be margined and shorted. Unit investment trusts hold a fixed, unmanaged portfolio under a trustee with a termination date and no management fee. Exchange-traded funds are legally open-end funds or UITs but trade intraday, with authorized-participant in-kind creation keeping them tax-efficient and priced near net asset value.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Pooled Investments unit for the complete lesson.