Introduction
Welcome to Alternative Investments - a unit covering three product types that fall outside traditional stocks, bonds, and mutual funds: Direct Participation Programs (DPPs), Real Estate Investment Trusts (REITs), and Hedge Funds.
Exam Weight: Part of 33 questions (44% of exam)
What You'll Learn
- What direct participation programs are and how pass-through tax structures work
- How limited partnerships are structured with general and limited partners
- How tenants in common share ownership of real estate investments
- Key characteristics of DPPs including illiquidity, tax benefits, and suitability
- What REITs are and how they provide real estate exposure to investors
- The differences between equity, mortgage, and hybrid REITs
- How listed, non-listed, and private REITs differ in trading and liquidity
- How REITs are taxed and why they must distribute 90% of taxable income
- The investment characteristics and risks of REIT ownership
- What hedge funds are and how they differ from traditional investment vehicles
- Accredited investor requirements, lock-up periods, and fee structures
- Common hedge fund strategies including long/short, global macro, and event-driven
- The unique risks of hedge fund investing including leverage and liquidity risk
Why This Matters
Alternative investments appear regularly on the SIE exam because they test your understanding of key distinctions: who can invest, how products are taxed, how liquid they are, and what protections investors receive. The exam loves to test the differences between these products and the traditional securities you've already studied.
The common thread across all three product types is that they offer unique benefits (tax advantages, diversification, higher return potential) but come with significant trade-offs, especially around liquidity and investor eligibility.
Let's start with Direct Participation Programs and how they pass income directly through to investors.