Exchange Fund Holding Period: What Actually Happens During and After 7 Years
Srikanth Narayan
Founder and CEO
The 7-year holding period is the part of an exchange fund people understand the least and tend to worry about the most. Some hear "7 years" and assume their money is completely untouchable. Others treat year 7 as a deadline when they’ll be forced to cash out. In reality, modern exchange funds, like Cache Exchange Funds, allow for much more flexibility.
This article walks through what the 7-year period actually is, what you can do during it, and what you get back when you reach the end of it.
TL;DR: After an exchange fund’s 7-year holding period, you get a basket of diversified securities back.
- An exchange fund’s 7-year holding period is not a lock-up, but some funds may have a lock-up of a few years. If your fund does not have a traditional lock-up, you may be able to request an early redemption, but it usually comes with some fees. Additionally, many funds have the ability to add lock-ups in other circumstances, so it is important to review your documents carefully.
- After the 7-year holding period, you’ll be able to get a diversified “basket” of securities back, when you redeem, typically individual stocks. There is no taxable event unless you sell those securities in the future.
- Cache’s Flagship Exchange Funds don’t have a fixed lock-up period, and after 7 years, you can decide whether you want all of your redemption to be made up entirely of diversified stocks, or have an ETF component in addition to those stocks.
Note, securities contributed to an ETF have a 7-year restriction on withdrawal, and the offering documents allow for additional lock-up restrictions, so please be mindful of your holding period as these are long term investment vehicles.
Why is there a 7-year holding period?
The first thing worth correcting is whose rule this is.
The 7-year holding period is not something Cache or other exchange fund providers created. It comes from the current tax code — Internal Revenue Code §704(c)(1)(B) and Internal Revenue Code §737. To receive the full tax-deferred treatment, the rules require an investor to hold the fund interest for 7 years before redeeming their stake as a diversified basket of securities.
The logic is that without this requirement, two investors could effectively swap their concentrated stocks through a partnership and each avoid tax — the 7-year rule prevents that by confirming long-term intent.
The holding period is not a lock-up
Time out
Lock-up vs. holding period
A lock-up is a window where you cannot redeem at all. A holding period is the time you need to stay invested to get the full tax benefit when you do redeem.
When people say an exchange fund "locks up your money for 7 years," it’s not entirely accurate, but it depends on the exchange fund provider. What the 7-year holding period governs is the tax treatment of how you exit — whether you can exit early is an entirely different question.
You’re actually not barred from exiting the fund before the holding period ends for most modern exchange funds. What is true, however, is that most exchange fund providers have a short-term lock-up period of a few years. Exchange funds are intended to be long-term diversification plays and require sophisticated management by the provider to balance toward a specific benchmark. The lock-up period is meant to ensure alignment between the investors and the fund.
Cache’s stance on lock-up periods depends on which type of fund you’re in:
Certain other exchange fund providers might have a longer lock-up of three years. You can read more about the differences in our article, List of exchange funds — providers and product details.
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What happens during the holding period?
For most of the period, there is nothing you need to do, and that is by design. The fund is managed on an ongoing basis with the objective being to track its benchmark index, so your exposure is intended to stay aligned to the index without any action on your part. There are no capital calls and no decisions required of you along the way. Your position simply appears as a limited-partnership line item at your custodian, holding its diversified exposure while the fund does the work of maintaining it.
That said, there still may be minor taxable events that the fund incurs. Typically, income comes from dividends from stock holdings as well as income from the “illiquid assets” facet that all exchange funds are subject to, which typically comes in the form of real estate and rental income.
In these cases, the only work on your end is that you’ll need to report dividend and rental income from the fund’s limited partnership structure through the Schedule K-1 form. One thing to note is that K-1 forms may be issued close to or even after the standard April 15th tax filing deadline, and it’s not uncommon for exchange fund investors to request tax filing extensions during the 7-year holding period when partnership income is reported.
You can learn more from our article here: What is included on the Schedule K-1 tax form?
Overall, the structure is built so that contributing and then leaving the position alone is the normal, intended experience.
How to exit an exchange fund before year 7
If you need to exit before the 7-year mark and you are not in a lock-up period described above, you can reach out to your exchange fund provider or see if they allow you to do it yourself on their dashboard or portal.
An early redemption may vary based on providers, but for normal redemption scenarios they return your originally contributed stock rather than a diversified basket, but the value of what you get back may vary.
Below, we’ve outlined what you get back if you exit a Cache exchange fund before the 7-year holding period. As you’ll see, it depends heavily on the fund’s performance in comparison to your original stock’s performance.
We’ll use a $1M exchange of Costco stock, COST, into the Flagship Bedrock fund in the example below.
All funds are redeemable only on the redemption terms specified in the offering documents, and any redemption fees are withheld from the redemption amount.
Perhaps most importantly, you would receive your securities back and would not receive a diversified basket, which is exactly why most people hold to the full period. But the option exists, and your wealth is not inaccessible.
For the mechanics of early redemptions for Cache exchange funds, see our article: How do redemptions from the exchange fund work before 7 years?
Flagship Fund exception: shares that participated in an Index Sync (Section 351) rebalance carry a 7-year holding period, regardless of the fund's general limited lock-up policy. Additionally, the Fund may also impose a lock-up during periods of extreme volatility or in other events necessary to protect the interest of the fund.
What do you get back at year 7 for exchange funds?
When the 7-year mark arrives, you have choices rather than an obligation. The most common question is also the simplest: what do I actually get back? The answer is a diversified basket of securities, which could be a mixture of individual stocks as well as ETFs.
Cache Exchange Fund investors have different options available to them depending on whether they’re an Accredited Investor or Qualified Purchaser.
- Qualified Purchasers investing in Cache’s Flagship Exchange Fund Series can decide whether they want all of their redemption to be made up entirely of diversified stocks, or have an ETF component in addition to those stocks.
- Accredited Investors investing in Cache’s Access Exchange Fund Series will receive a set of diversified stocks. There is no ETF component available.
In both cases, your original cost basis carries forward and no tax is due at year seven. Redeeming at year 7 is not a taxable sale; it is treated as an exchange. Your cost basis carries into the basket you receive, and any capital gains and related taxes remain deferred until you actually sell those securities.
Different funds follow different benchmarks, so the diversification you get in your basket of securities depends on which exchange fund you are an investor of.
Cache's funds track major equity indexes as outlined below; the basket of securities that you redeem for each fund will differ as they are specific to those benchmarks.
*Cache Exchange Fund Cobol, LLC is a fund that is currently anticipated to launch in August 2026, but is not in active operation. Cache additionally has several Accredited Investors funds benchmarked to the Nasdaq-100 that are not open to new investors.
Example: a qualified purchaser in Cache’s UNIX exchange fund
UNIX is a Cache Flagship Exchange Fund that uses the Nasdaq-100 as its benchmark. At the end of the 7-year holding period, you would have three options:
- Standard stock redemption: your basket would hold a representative set of Nasdaq-100 names, such as Apple, Microsoft, Nvidia, and Amazon, assembled to keep tracking the index.
- Mixed redemption: your basket would be delivered as a mix of stocks and ETFs that still benchmark you against the Nasdaq-100.
- Stay invested in the fund: instead of redeeming your basket of securities, you’ll keep your in-kind ownership of the fund for a small management fee.
Either way, your carried-over cost basis comes with you, and there is no taxable event for any of the options above until you decide to sell.
Why would someone stay invested after the holding period?
Staying invested might sound strange when you've waited 7 years to redeem your basket of securities. The primary benefit of staying invested is that you keep the same diversified exposure at a reduced ongoing fee, with the fund doing that work for you.
This does not change your tax position: neither staying nor redeeming is a taxable event, so the gain stays deferred either way, and the deferral only ends when you eventually sell the underlying securities.
You can still redeem any time after the 7-year holding period ends, but this option gives you time to decide what you want to do with your holdings and whether you want to be the one managing your basket of securities.
A final note: how to think about year 7 for exchange funds
Step back and the 7-year mark looks less like a restriction and more like a vesting date for a tax benefit. You get the diversification immediately. You hold through the period the tax code specifies, seeking to obtain benchmark-like returns the entire time. And at the end, you have a set of choices: take a diversified basket with your basis carried forward, take part of it as an ETF if you qualify, stay invested, or, if life requires it, exit earlier at the cost of the tax advantage.
The fear that an exchange fund traps your money for 7 years gets the structure backward. The diversification is immediate and the exit is flexible. What waits until year 7 is simply the most tax-efficient version of leaving, on the terms that suit you.
If you are weighing an exchange fund and want to understand how the holding period would interact with your own timeline and basis, our team can walk through the specifics with you, and we are glad to coordinate with your advisor.
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Exchange Fund Holding Period FAQs
What happens after an exchange fund's 7-year holding period?
After 7 years, you can redeem and receive a diversified basket of securities. Your original cost basis carries forward and no taxable event occurs at redemption — taxes are deferred until you sell the securities you receive.
Is the exchange fund 7-year holding period a lock-up?
No. A lock-up prevents you from exiting at all. The 7-year period is an IRS requirement: stay invested for 7 years and your redemption is tax-deferred. Exit early and you typically receive your original stock back and may pay a redemption fee. Cache's Flagship funds have no lock-up; the Access Series has a 2-year lock-up.
Additional redemption conditions may apply and are specified in our offering documents.
Can I leave an exchange fund before 7 years?
Yes, in most cases. Cache's Flagship Exchange Funds allow early redemptions after providing notice subject to a 1% fee. The Access Series has a 2-year lock-up period, after which early exit may be possible with a ~2% fee. In both cases, early redemption typically returns your original contributed stock rather than a diversified basket.
Do I have to sell my securities when the 7 years are up?
No. At year 7 you have two options:
- Redeem a diversified basket of securities
- Stay invested in the fund
Neither of these options triggers a taxable event on their own. The main taxable event would be if you were to sell any of the securities you redeem after the 7-year holding period.
What securities will I get back after 7 years in a Cache exchange fund?
It depends on which fund you're in. You will receive securities that are typically aligned to the following benchmarks. UNIX tracks the Nasdaq-100 (e.g., Apple, Nvidia, Microsoft). Bedrock tracks the S&P 500. Mosaic tracks the S&P 500 Growth index.
Flagship investors may also receive an ETF component alongside individual stocks.
What happens if I contribute to an exchange fund multiple times over multiple years?
Investors may decide to contribute their stock over multiple years for a few reasons, such as:
- An employee vests RSUs or options over multiple years
- An investor wants to test the exchange fund with a smaller investment first
- An investor wants to dollar-cost average or tranche their entry into the exchange fund, especially if they expect their stock position to appreciate in the near future
Please consult with your tax advisor regarding the impact this has on your redemption periods.
What happens if Cache goes out of business or gets acquired during my 7-year holding period?
Cache is growing quickly and has a strong balance sheet.
Your assets are held independently at Bank of New York Mellon, one of the world's largest custodians, and managed by a third-party fund administrator that independently handles valuations, reporting, and quarterly oversight of the funds. Cache acts as the investment advisor — a role that can be transferred to another manager without disrupting your fund's tax treatment or timeline.
If Cache were unable to continue operating, the fund administrator would step in and hold a vote among investors (the limited partners) to decide whether to appoint a new advisor or to dissolve the fund.
Can I borrow against my exchange fund investment during the 7-year holding period?
Exchange fund interests are structured as limited partnership shares, which are not publicly traded and cannot be pledged as collateral at a traditional brokerage. This is true of exchange funds broadly, not just Cache's. Once your shares are in the fund, standard margin borrowing is not available.
Cache is working to establish a lending product whose intention is to allow investors to borrow against their exchange fund shares. If this is important to your planning, reach out to Cache directly for the latest status.
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