Exchange fund


An exchange fund or swap fund is a mechanism specific to the U.S., first introduced in the late 1960s, that allows holders of a large amount of a single stock to diversify into a basket of other stocks without directly selling their stock.
The purpose of this arrangement is to diversify their holdings without triggering a "taxable event". Note that the tax is not avoided, just postponed; when the diversified holdings are eventually sold, tax will be due on the difference between the sales price and the original cost basis of the contributed stock.

Criticism

The U.S. Securities and Exchange Commission has investigated the use of these arrangements with reference to the potential for market abuse by directors not disclosing their effective divestment in stocks for which they are privy to sensitive market information.
In addition there is general criticism that tax revenue that might otherwise have been generated is avoided. Many holders of these positions may elect to hold the concentrated position and borrow against it rather than sell and pay the associated capital gains tax.

Providers

There are exchange funds for publicly held stock and private stock. Eaton Vance is the largest of the public stock exchange fund providers and many of the large brokerage houses such as Goldman Sachs, Morgan Stanley etc. have exchange funds as well. Startup Exchange Fund and EB Exchange are the best known companies that specialize in exchange funds for privately held equity.

Detailed structure

Private equity exchange funds differ from public exchange funds in a few regards: