Exchange Funds

This exclusive product enables the investor to “exchange” their concentrated position for a diversified portfolio. An exchange fund would allow our high-net-worth investor to deposit their concentrated stock position into a limited partnership in exchange for units of the partnership. Other investors do the same thing, and the end result is a diversified fund made up of many concentrated positions. The diversification benefit is obvious, but exchange funds also allow tax deferral, as taxes aren’t usually due until the shares are sold.

In addition, after a period of time (depends on the fund, but usually seven years) an investor may be able to withdraw shares and have a diversified portfolio of individual stocks. One potential pitfall to exchange funds is that the shares must be accepted by the fund. If the shares that our investor held weren’t needed by the fund, she would have to find another fund that would accept them, and the universe of available exchange funds is limited. Fees can also be high and exchange funds do not offer immediate liquidity.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.