Investors who are concentrated in a single stock — for example, employees of Silicon Valley companies who receive stocks and options as part of their compensation packages — may have a new option for diversification.
Cache, a startup led by founder and CEO Srikanth Narayan, has launched the Cache Exchange Fund to serve this market. Exchange funds are pools into which investors with concentrated stock positions can contribute stocks to a public fund, with the option to withdraw from the basket of stocks after seven years (although they can also choose to remain invested). The original capital contribution is not included in taxable matters, and when stocks are subsequently redeemed, the original concentrated stock position is the cost basis. (If investors choose to exit before the seven-year period, they will get back their original shares, not a diversified basket.)
“If I were the holder of a concentrated stock position, and I did not intend to acquire most or any of that position, I could use this strategy as an estate planning technique to exchange a single stock for a basket of individual stocks” My goal is to give me The heirs are left with a basket of securities rather than a single stock. ” said Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary. “Also, the basis step-up under current tax law still applies to non-qualified assets, which are non-retirement assets. So this diversification strategy is more attractive because if we can leave a basket of about 25 or so individual stocks, those Stocks are inherently diversified across industries, sectors, etc., then that diversification strategy is interesting from an underlying risk management perspective versus taking on idiosyncratic risks specific to a single stock.”
The Exchange Fund itself is not new. Eaton Vance pioneered their use and development decades ago. However, exchange funds typically require a minimum contribution of $1 million. Cache is unique in that the minimum investment is only $100,000. Another feature of this fund is that it is benchmarked against the Nasdaq 100. The fund has monthly closing prices and also provides monthly NAV.
Cache’s first exchange-traded fund includes shares from more than 50 companies, with an average commitment of $650,000, and the firm is reportedly working on a waiting list of more than 1,000 investors with reservations worth more than $900 million, Covers stocks of 150 companies. It has also partnered with several wealth management advisors, including Adero Partners, Citrine Capital, Fort Point Capital and Three Bell Capital, and raised $8.5 million in seed funding co-led by First Round Capital and Quiet Capital.
Adero Partners is a Pleasanton, Calif.-based wealth management firm that manages $3.5 billion in assets for 900 individuals and families and has many clients working in Silicon Valley.
“We’ve been looking at them for years, but in the past the cost structure wasn’t favorable, the fees were higher, there wasn’t a lot of transparency into what shares you would get in year seven, and the minimums were high,” said Aaron White, Adero’s chief growth officer. . “Early last fall, I connected with Cache, had some initial conversations, completed the review, and we were very impressed with what we saw.”
Features that attracted White include the fact that the fund is open to accredited investors, not just qualified purchasers. Adro also likes that the fund tracks the Nasdaq 100 Index.
In addition to exchange funds, Cache also provides stock lending and advance services directly to retail investors.
Narayan, a former Uber employee, sought to develop the product after he began exploring options on how to diversify Uber stock. He cashed out and bought other stocks, but paid the capital gain. After later learning about Exchange Funds, he sought to develop a product that would be more accessible to other investors in the same position.
“A large amount of my net worth is invested in Uber stock,” Narayan said. “I talked to a few exchange funds but either wasn’t accepted or was put in a long queue. That’s what prompted me to find a more efficient way to do this. 99% of my friends and colleagues simply didn’t Know that exchange funds exist. They may spend years or decades tying their entire portfolio to one company.”
There are other strategies that deal with concentrated stock positions. For example, investors can realize some tax-loss harvesting through SMA direct indexing, but this strategy takes time, and typically, if concentrated stocks appreciate a lot, it’s difficult to find big compensation. Other options include donating stock to a charitable trust, tax-bracketing, or using annual gifts to pass on up to $18,000 per year to heirs.
