and Now the investor owns a share of a fund that contains a portfolio of different stocks—which allows for some diversification. These companies pool investors’ stocks and build a diversified basket of stocks designed to track a broad-market stock index, typically the S&P 500 or the Russell 1000. Because an investor swaps shares with the fund, no sale actually occurs. Then, each investor is given interest in the collective shares based on their portion from the original contributions. Many successful investors hold portfolios that are too heavily concentrated in a single stock. A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is overseen by a professional money manager. An error has occurred, please try again later. A unitized fund is a type of fund structure that uses pooled funds to invest with individually reported unit values for investors. Exchange funds are particularly appealing to concentrated shareholders who wish to diversity their otherwise restricted holdings. “ Exchange funds pool large amounts of concentrated shareholders of different companies into a single investment pool. As the fund grows, and when enough shares have been contributed, the fund closes to new shares. Eaton Vance. Minimums run from $500,000 to $1 million. The market for these is either hot or cold, and now it’s hot. Exchange funds will also typically have a seven year lock-up period to satisfy the tax deferral requirements, which could pose a problem for some investors. “There’s a chance the stock market will go down,” Curley says, “but the chances of it going down as much as an individual stock is much less.”. A security is a fungible, negotiable financial instrument that represents some type of financial value, usually in the form of a stock, bond, or option. Belgard Capital Fund LLC raised $3,052,296,151 in total. The most common allocation is to real estate. The fund sponsor sells shares directly to investors and buys them back as well. With each shareholder that contributes, the portfolio becomes increasingly diversified. Belgard Capital Fund LLC Filings But in the late stages of a bull market, a diversified basket may be a better bet to stem losses and drive long-term growth, Curley says. An exchange fund may be marketed toward executives and business owners, who have amassed positions that typically are centered on one or a handful of companies. Or the stock may have achieved its dominant position simply by outperforming other holdings over time. This copy is for your personal, non-commercial use only. Exchanged funds may require the potential participants to have a minimum liquidity of $5 million cash to join and contribute. (adsbygoogle = window.adsbygoogle || []).push({}); Belgard Capital Fund LLC raised $3,052,296,151 from 903 investors on 2020-09-17. Up to 80 percent of the assets in an exchange fund can be stocks, but the rest must be made up of illiquid investments, such as real estate investments. The exchange fund takes advantage of the fact that there are a number of investors in a similar position with a concentrated stock position who want to diversify. For open-end mutual funds, the fund's current prospectus contains this and other information about the fund. These tools don’t diversify a portfolio from an asset-allocation point of view—the assets remain within the stock portion of the portfolio. Those shares will be dependent on what has been contributed to the fund and is still available. Their last time in the spotlight was late in the 1990s tech boom, as investors found themselves grappling with how to minimize taxes on massive gains in blockbuster stocks like Dell, EMC, and Clear Channel Communications. Or, someone who inherited assets from a family business.”. The purpose is to allow large shareholders in a single corporation to exchange their concentrated holding in exchange for a share in the pool's more diversified portfolio. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors. The public funds offer investors portfolio shares containing publicly traded firms. Participants in an exchange fund will contribute some of the shares they hold, which are then pooled with other investors’ shares. That’s a bonus worth considering. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com. An employee stock option (ESO) is a grant to an employee giving the right to buy a certain number of shares in the company's stock for a set price. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. They also appeal to large investors who have highly appreciated stock that would be subject to enormous capital gains tax if they sought to diversify by selling those shares to purchase others in the market. There are two reality checks that investors should make before jumping in. Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. Exchange funds are designed to appeal primarily to investors who previously focused on building concentrated positions on restricted or highly appreciated stock, but who are now looking to diversify. So, in this type of fund several investors pool their shares into a partnership, and each investor receives a pro-rata share of the exchange fund. Futures/Commodities Trading Strategy & Education, Investopedia uses cookies to provide you with a great user experience.