Pooled Investments

The whole unit on one sheet: the five vehicle types, how each is priced and traded, who can invest, and the distinctions the exam loves to test.

The One-Liners That Win Points

• Open-end = always at NAV. Closed-end = market price. If a question mentions shares trading at a premium or discount, it is a closed-end fund.
• Forward pricing applies only to open-end funds: all orders execute at the next calculated NAV, never a stale price.
• A closed fund (open-end fund that stopped taking new investors) is NOT a closed-end fund.
• Closed-end funds can use leverage; open-end funds generally cannot.
• Private funds are for accredited investors and qualified purchasers only, never the general public.
• Hedge funds are organized as limited partnerships: the manager is the general partner, investors are limited partners.
• Venture capital is a subset of private equity, focused on early-stage startups, not a separate category.
• Fixed portfolio plus termination date = UIT. Active trading rules it out.
• UITs are redeemable at NAV like open-end funds, but they are NOT open-end funds (fixed portfolio, set termination date).
• ETFs trade at market prices, not NAV, but the authorized participant arbitrage mechanism keeps price very close to NAV.
• ETF tax efficiency comes from the in-kind creation and redemption process, not simply from tracking an index.
• The distribution requirement applies to ALL REITs, both exchange-listed and non-traded.

Numbers to Lock In

Mutual Funds

• Open-end: continuous offering, priced once daily at NAV, forward pricing, bought from and redeemed with the fund company, highly liquid, always at NAV (no premium or discount).
• NAV = (Total Assets minus Total Liabilities) divided by Shares Outstanding.
• Closed-end: fixed shares via initial public offering (IPO), trades on an exchange intraday at a market price set by supply and demand (premium above NAV, discount below NAV), may use leverage, less liquid.

Private Funds

• Not registered under the Investment Company Act; restricted to accredited investors and qualified purchasers; less oversight, less liquid.
• Hedge funds: aggressive strategies (short selling, leverage, derivatives, concentrated positions); limited partnership structure; "2 and 20" fee with a high-water mark; lock-up periods restrict redemptions.
• Private equity: buys, improves, and sells companies; capital calls draw committed capital over time; "2 and 20" often on committed capital with a hurdle rate; very illiquid.
• Venture capital: subset of private equity in early-stage startups; very high risk; managers often take board seats.
• Gotcha: capital calls (private equity, venture capital) commit money drawn over time; lock-up periods (hedge funds) bar withdrawing invested money for a set period.

Unit Investment Trusts (UITs)

• Fixed portfolio of stocks OR bonds selected once and held; not actively managed; full transparency at purchase; lower fees.
• Self-liquidating on a set termination date; bond UITs often terminate when the bonds mature; at termination, securities are sold and proceeds distributed, or investors take an in-kind distribution.
• Units are redeemable at NAV, but "not actively managed" still lets the trustee sell a seriously impaired security.

Exchange-Traded Funds (ETFs)

• Intraday trading at market prices; mostly passive index tracking (but actively managed ETFs exist); lower expense ratios; can be sold short, bought on margin, and traded with limit and stop orders.
• Authorized participants (APs) are institutional broker-dealers (not individuals) who create shares by delivering a basket of underlying securities for a creation unit, and redeem in reverse.
• Arbitrage by APs keeps market price near NAV; in-kind redemptions avoid forced selling, so ETFs pass through fewer capital gains than mutual funds.

Real Estate Investment Trusts (REITs)

• Owns, operates, or finances income-producing real estate; must distribute at least 90% of taxable income as dividends; dividends taxed as ordinary income (not the lower qualified rate).
• Exchange-listed: trades on major exchanges, liquid, transparent real-time pricing, subject to stock-market volatility.
• Non-traded: registered with the Securities and Exchange Commission (SEC) but not listed; illiquid, hard to value, 9 to 10% upfront fees, limited or no redemption, and distributions may come from offering proceeds or borrowings rather than real estate income.
• Gotcha: "registered" does not mean "listed"; limited liquidity plus high commissions signals a non-traded REIT.

Top Gotchas

• A premium or discount to NAV always points to a closed-end fund, never an open-end fund or an ETF.
• QIB-style access aside, private funds are closed to the general public; a fund open to anyone is not a private fund.
• "2 and 20" is standard across all three private fund types, but hedge funds use a high-water mark while private equity uses a hurdle rate.
• UITs redeem at NAV yet are not open-end funds; the fixed portfolio and termination date are the tell.
• ETFs are tax-efficient because of in-kind creation and redemption, not because they track an index (an index mutual fund still uses cash redemptions).
• A non-traded REIT's high distribution is not a good sign on its own; it may be paid from investor capital, not property income.

One-Breath Recap

Pooled investments split by structure: open-end mutual funds price once daily at Net Asset Value (NAV) with forward pricing and always trade at NAV, while closed-end funds issue fixed shares in an initial public offering and trade on an exchange at a premium or discount, sometimes using leverage. Private funds (hedge, private equity, venture capital) are limited to accredited investors and qualified purchasers, run "2 and 20" fees with a high-water mark or hurdle rate, and stay illiquid through lock-up periods or capital calls. Unit Investment Trusts (UITs) hold a fixed portfolio to a set termination date and redeem at NAV without active management, while Exchange-Traded Funds (ETFs) trade intraday at market prices kept near NAV by authorized participants, earning their tax efficiency from in-kind redemptions. Real Estate Investment Trusts (REITs) must distribute at least 90% of taxable income as ordinary-income dividends, and the non-traded variety adds illiquidity, 9 to 10% upfront fees, and distributions that can quietly come from investor capital. Match each vehicle to its pricing, liquidity, and access rules and the whole unit answers itself.

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.