Does anyone recall what area of the Level 3 curriculum deals with strategies for handling concentrated stock positions??
LOS: 2007-III-5-23-c 23. “Low-Basis Stock” The candidate should be able to: c) judge the effectiveness of outright sales, exchange funds, completion portfolios, and hedging as financial strategies to reduce concentrated equity risk.
Thanks. Does anyone have any real world experience using exchange funds??
There was some impossible question about this on last year’s exam. After the exam, there was some 80 post argument about the right answer that was still not agreed on.
Getting Out Wrote: ------------------------------------------------------- > Thanks. > > Does anyone have any real world experience using > exchange funds?? A typical exchange fund allows you to send them 20% of your holdings with a 7-yr lock-up with a $1M minimum. People who can do that are not typically studying for their CFA exams…
By real world experience, I was asking if anyone works for a firm who does this type of transaction or has any other relevant experience with exchange funds.
JoeyDVivre Wrote: ------------------------------------------------------- > There was some impossible question about this on > last year’s exam. After the exam, there was some > 80 post argument about the right answer that was > still not agreed on. It turned out there were two correct answers. Equity collar and “private exchange fund”
^ Yep, I remember that now.
Getting Out Wrote: ------------------------------------------------------- > By real world experience, I was asking if anyone > works for a firm who does this type of transaction > or has any other relevant experience with exchange > funds. i’ve had clients invest in them. eaton vance runs a good one. they are usually 5 year lockups. any specific questions about them? they’ve outperformed over the years (probably unitl this year) because they have to invest a % in real estate. assuming the IRS continues to allow it, they are great ways to diversify. they used to suffer from the problem that the executives who tended to invest in the funds obviously felt their stocks were overpriced and thefore in the 90s you got a lot of csco, intc, amazon, etc, but these days you can get ones that are part of other funds and therefore don’t have the selection bias.
I do a little work with exchange funds. The essence is, you pledge your stock along with many others with single stock holdings, and you get a share of the resulting fund that looks and acts like a diversified fund. In my experience, managers are choosy about what they accept when they “build” the fund, so the team needs to “want” the stock you are pledging and may only take a portion if others have already pledged it. In order to transition yourself from being the owner of your stock to an owner of your pro rata share of the pool, you cede any control over your individual holdings when you pledge them to the fund and you have no access to them. After some period (3-7) years, your position in XYZ stock is magically transformed into a slice of the exchange fund. It doesn’t eliminate the cost basis or taxes, but it can provide you with the benefits of diversification. There are a few firms that do it, and they all generally have different requirements (net worth hurdles) for participation (qualified investor/buyer vs. accredited investor). As someone else mentioned, Eaton Vance offers them, and also in my experience a provider with one of the lowest hurdles for entry. Usually, if you try to opt out before the lockup ends, you end up getting the LESSER of the value of your holdings or the value of your share of the fund. The managers have net worth requirements that gives them an assurance that you won’t want to opt out because you “need the cash”.