Diversification is the key to successful portfolio management over time. Concentration in an individual holding, however, is the antithesis of this widely accepted investment strategy. One possible solution to a concentrated portfolio is an exchange fund. By exchanging shares of a single stock for a partnership interest in a diversified, professionally managed fund, an investor may gain a measure of diversification, along with potentially significant tax savings.
The Case for Exchange Funds Generally, after seven years, investors who contributed their single stock to an exchange fund can withdraw their interest in the form of a diversified basket of securities contributed by fellow investors in the fund Typically, as long as the fund holds 20% of assets in non-public securities such as real estate partnerships, there are no capital gains taxes owed when shares are distributed at the end of the seven-year period
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