Exchange fund

Also called: Swap fund

An exchange fund lets holders of appreciated single stocks contribute their shares into a shared partnership and receive a pro-rata interest in the diversified pool. The contribution is not a taxable sale, so the embedded gain is deferred.

What are the trade-offs of an exchange fund?

Diversification and deferral come with strings: a typical seven-year lockup, the requirement that the fund hold a portion in illiquid qualifying assets, manager fees, and loss of control over the underlying holdings. You also do not choose the diversified mix. The original cost basis carries over to the fund interest.

How does it compare to an option overlay?

An exchange fund swaps your single stock for a fund interest and locks it up; an option overlay keeps you in your own shares while hedging and generating income, with more control and no multi-year commitment. The right choice depends on liquidity needs, timeline, and how much control matters.

This definition is for educational and informational purposes only and is not investment, tax, or legal advice. Option strategies involve risk and are not suitable for all investors. Tax treatment of options is complex and depends on individual circumstances, holding periods, and applicable law. Consult a qualified tax professional and investment advisor before acting. Yayati Asset Management is a Registered Investment Adviser.