How executives use exchange funds to diversify without selling
CNBC••general
Key Points:
- Executives and founders with large holdings in a single tech stock face significant risk and opportunity, with advisors recommending no more than 10% of a portfolio be invested in one stock.
- To diversify without triggering hefty capital gains taxes, some investors use exchange funds, which pool shares from multiple investors and allow redemption into a diversified basket of stocks after a typical seven-year lock-up period.
- Exchange funds have gained popularity recently due to strong stock market returns and increased equity compensation in tech companies competing for AI talent, but they require investors to be accredited and accept limited liquidity.
- While exchange funds help reduce risk and provide a wealth transfer strategy, some advisors caution about the long lock-up period and suggest alternative de-risking strategies like collars, variable prepaid forwards
