Diversify without a giant tax bill

The main benefit is tax-advantaged diversification. Overexposure to a single company stock means higher risk, more volatility, and statistically less growth.
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The probability of any stock outperforming the market is low. In 2022, for example, only 12% of stocks in the Nasdaq-100 index meaningfully outperformed the index, and only 1% outperformed the index by more than 50%.
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Over a longer timespan, index funds have produced higher risk-adjusted returns than all but a handful of stocks. The average equity investor underperformed the S&P 500 by 4.32% over the 20-year period from 1992–2011. Based on Cache’s internal research, since 2002, over 80% of Nasdaq-100 stocks underperformed the index over a 5-year period, and 85% underperformed over a 7-year period.

With Cache as your exchange fund provider, you’ll exchange your equity for a diverse set of investments without triggering taxes. This tax deferral ensures that the full value of your stock stays invested in the market, compounding over time. Assuming historic stock returns, this could add to a sizable advantage over time.

With our exchange funds, our goal is to help you diversify your large stock positions into a fund that approximates the performance of the broader index – specifically, the Nasdaq-100 Index.

While many tech stocks loosely track the performance of the Nasdaq-100, its performance over time has surpassed most of the individual stocks it contains. As an index fund, it also tends to have less volatility than its constituent stocks while maintaining a similar upside profile.

At the end of the seven-year maturation period, you’ll be able to choose between remaining in the fund or withdrawing a diversified basket of stocks that matches your pro rata share. Cache does not charge any redemption fees after the seven-year maturation period.

There isn’t a “sale” that triggers a taxable event upon redemption from an exchange fund. You’ll receive a basket of stocks that you can continue to hold or choose to sell.

If you do decide to sell shares you’ve withdrawn from the fund after the seven-year window, the cost basis of those shares will be equal to the cost basis of the stock you originally contributed to the fund.

With every fund, we evaluate the incoming requests and carefully weigh them to quantitatively approximate the characteristics of the Nasdaq-100. We do not aim to replicate the index, and any fund might have underlying holdings that are different from the Nasdaq-100. That being said, we anticipate the largest holdings in the exchange fund be those in the Nasdaq-100 Index (e.g., AAPL, MSFT, NVDA, GOOGL, etc.) Before you commit to participating in the fund, you’ll receive detailed information about the matched portfolio for the fund.

Current tax rules also require us to commit 20% of the investments in the fund to illiquid assets – usually satisfied with a real estate asset. When all the pieces come together, we want the fund to provide a diversified investment portfolio that reduces your risk while providing growth characteristics similar to the Nasdaq-100.

When you participate in the fund, your ownership of a specific stock is exchanged for an equivalent share in the fund. Your ownership share is locked in when the fund is formed.

While the movements of individual stocks influence the value of the fund, each investor’s outcome is driven by the performance of the diversified portfolio in the fund – not the stock you initially contributed.

Income generated from dividends (or from real estate) will primarily be used to meet the investment objectives and expenses of the fund. At the fund manager’s discretion, any excess income would be distributed to fund participants.

The exchange fund investment is a private investment that issues a Schedule K-1 annually. As the exchange fund generally avoids a sale of contributed stocks, only minor tax issues should be expected.

As a sophisticated investment with a long-term outlook, the Cache Exchange fund is only open to some investors.

Tell us about your situation, and we’d be happy to explain your options. Three factors drive your ability to participate in the Exchange Fund:

1) Eligibility:

Are you an “accredited investor”? Under Regulation D of the Securities Act, investments like Exchange Funds are only available to investors who:

• Earned more than $200,000 each of the last two years
• Earned more than $300,000 as a couple
• Or have a net worth of over $1,000,000, excluding their primary residence.

If you meet any of those criteria, you typically meet the basic requirement for eligibility. Most other exchange fund providers require investors to meet the higher threshold of being a “qualified purchaser” with over $5 million in investments. Note that certain trusts and LLCs are also eligible to participate.

2) Minimum contribution:

We typically require a minimum investment of $100,000 (which can be spread over multiple stocks if needed). You are invited to reserve a spot in the fund even if your intended contribution falls below that threshold: we may waive the minimum on a case-by-case basis for select stocks that help with overall investment objectives.

3) Allocation:

Will your stock help our fund meet investment objectives? In each Exchange Fund we launch, our matching process carefully selects and weighs stocks to create a diversified portfolio toward a particular investment objective – like approximating the Nasdaq-100 index. To achieve that balance, we can only take certain amounts of different stocks in each fund.

If we are unable to offer you an allocation in one fund, we’ll consider your interest for a future fund automatically.

An ETF ("exchange-traded fund") is a fund that can be bought and sold on public exchanges. They typically hold a pool of stocks and/or bonds towards a particular investment objective. You can buy ETFs with your money at most brokerages.

An exchange fund is a tax-efficient private fund owned by investors who exchange their individual stock for shares in the fund. Exchange funds only accept “in-kind” stock contributions, not cash. Also, shares in the fund cannot be bought or sold on public exchanges.

The understandable confusion between “exchange fund” and “ETF” is caused by the two very different definitions of “exchange” in their respective names.

We've rethought exchange funds from the ground up, turning a mostly manually run operation into a highly precise and automated solution that’s accessible to a much larger audience.

Even if you don’t meet the minimum, you can reserve a spot. Our team will be able to waive the minimum on a case-by-case basis for select stocks that help with overall investment objectives.

You can probably contribute fully vested stock in your company, but it depends on your company’s policy and your position in the company. If you’re not sure, that’s okay. Tell us about your situation, and we’ll help you figure out if you’re eligible to participate before you contribute. Many large firms like Apple, Nvidia, Microsoft, Meta, Tesla, and Amazon have friendly policies.

Generally, we encourage companies to follow the standards set by Apple. In their 2022 Proxy Statement, they include, "We allow for certain portfolio diversification transactions, such as investments in exchange funds."

While we can often accept stock from your current company, we can only accept fully vested shares. Exchange funds are a good fit for long-term investors with taxable gains on their holdings.

The Exchange Fund swaps your stock shares for a pro-rata share of the fund. Because there is no “sale,” your cost basis from the stock is transferred to your share in the fund.

After the seven-year maturation window, you’ll be able to withdraw a diversified basket of stocks from the fund. The cost basis of those shares will be cumulatively equal to the cost basis of the stock you originally contributed. The original cost basis is spread across the entire basket of stocks based on a method required by the tax code.

The cost basis may increase if our fund managers are able to tax-loss harvest or implement other tax management strategies during the lifespan of the fund.

When you redeem your shares from the fund, we transmit the adjusted cost basis of the diversified basket to your brokerage account at Cache. If you move your shares from Cache to another brokerage, we should be able to report the cost basis data through the Cost Basis Reporting System.

Per current tax rules, 20% of the fund must be invested in illiquid qualifying assets for the transfer of stock to be treated as a non-taxable event. Most exchange funds satisfy this requirement through real estate investments.

With the Cache Exchange Fund, we work with the best-in-class institutional real estate investment firms in the country to secure an allocation with funds that invest in Core Diversified Real Estate (stable, income-generating, high-quality properties like multi-family apartments, industrials, self-storage, data centers, and more). We do not invest in REITs and other real estate investments that might involve higher leverage strategies.

At the end of seven years, any appreciation in the real estate properties would be captured in the appreciation of your fund share value. While we do not distribute any real estate shares, the real estate participation will be distributed through cash or other securities.

As the fund seeks to avoid sales of contributed stocks, the rebalancing efforts are limited to other portfolio management techniques that help achieve the investment objective. The fund managers might elect to rebalance through direct or synthetic exposure gained through additional contributions or purchases.

Cash that’s organically generated within the portfolio — through dividends, corporate events, etc. – may be used to help rebalance the portfolio. Fund managers may allow additional investors to contribute securities to the fund, so long as such contributions are additive to the fund achieving its investment objective.

Each of our funds is an independent entity owned by its investors, with Cache maintaining little to no ownership in these funds. Each fund is custodied at a global bank (BNY Mellon), and administered by a leading independent fund administrator.

Cache Advisors is an SEC-registered Investment Advisor that advises these funds, and a fully-owned sub-entity of Cache Financials Inc.

In the event that Cache is no longer viable, this setup allows for a smooth transition:
1. Cache Advisors LLC can continue on as a thin entity that fulfills its responsibilities funded solely by the fund revenues.
2. Investors have the right to appoint another manager to carry out the investment advisory duties. Since each fund generates revenue, another capable advisor can step in to assume advisory duties.

Our legal documents provide higher investor protections than customary, and contemplates necessary steps for a transition:

‍“Anything in this Agreement to the contrary notwithstanding, the Manager may at any time resign if (i) the Manager has designated and admitted to the Fund as a successor Manager any corporation, trust, business trust, limited liability company, partnership or other entity that is wholly owned, directly or indirectly, by Cache (provided that such corporation, trust, business trust, limited liability company, partnership or other entity has, or its personnel have, similar management experience to Cache) and each of the Shareholders, by acquiring Shares of the Fund, hereby consents to the admission of such successor Manager; or (ii) the Manager, with the Consent of the Shareholders, has designated and admitted a substitute Manager; provided that any such succession or substitution shall be effective upon such resignation and shall not in the opinion of tax counsel to the Fund adversely affect the classification of the Fund as a partnership for federal income tax purposes. In the case of the Bankruptcy of the Manager (herein in such event called a “Bankrupt Manager”), those Shareholders holding a majority of the outstanding Shares shall have the right to designate and admit to the Fund a substitute Manager by filing written consents to such action with the records of the Fund.” 
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"Shareholders will have the limited right to consent to… (ii) the designation of a substitute manager of the Fund upon the bankruptcy of the Manager or if the Manager resigns as manager and does not designate a Cache affiliate as substitute manager."

Our funds are designed to help you diversify your investments while deferring taxes. They are carefully constructed around a well-known growth index, the Nasdaq-100, which includes many innovative companies, including the so-called magnificent seven (as of Nov 2023). The fund is not an “actively managed” fund with a mandate to perform better than the benchmark index. We generally do not make investment decisions that deviate significantly from the benchmark and approximate well-known benchmarks through quantitative methods.

By swapping a single stock for ownership in a diversified pool of stocks, we help you reduce concentration risk. With an exchange fund, you invest 100% of your principal, which means that your investments compound from a larger base. This could result in significant tax alpha.

All investments have risks, and there is no guarantee of future returns, but there is detailed research that shows diversified investments often outperform individual stocks over time, and that deferring taxes can lead to more growth.

Try our exchange fund simulator to see how different scenarios may play out, or talk to an investment advisor for advice that’s specific to your situation.

Cache makes exchange funds easier and more accessible than other providers. Our funds break down the barriers to investing in exchange funds through lower minimums, lower eligibility criteria, and lower fees that are offered direct-to-consumer. We also offer an intuitive and accessible experience that demystifies a previously labyrinthine financial instrument.

When you sell highly appreciated stocks to diversify your holdings, you’ll incur capital gains taxes. Depending on your situation, those taxes can eat up more than 35% of your investment – and it can take years of steady appreciation to get back to where you started.

An Exchange Fund lets you diversify without incurring a tax bill upfront. Every dollar of tax that is deferred is a dollar that's out working for you. Over time, this can compound to a huge advantage even after you pay all the taxes down the line. See examples and illustrations, or try our exchange fund simulator.

Many investment advisors say you’re exposed to concentration risk if more than 10% of your net worth is tied up in a single stock. When you have a concentrated stock position, your portfolio experiences the movement of that stock in an outsized way – and it could expose you to significant financial losses if the stock performs poorly. See research and examples.

Moving to a diversified position via an exchange fund reduces this risk. The Cache Exchange fund approximates the characteristics of the Nasdaq-100 index fund – and it spreads your risk across many stocks in different industries.

Our fees are considerably lower than other exchange funds – typically 0.4% to 0.8% of assets under management on an annualized basis. We determine fees based on the gross assets in the fund, and management fees are charged monthly.

There are no sales fees or performance fees. No redemption fees are charged if an investor remains in the fund for at least seven years.

The seven-year holding period is based on the current tax code, and it applies to any brokerage that offers an exchange fund.

However, the seven-year requirement is significantly shorter than the timeframe for many alternative tax-advantaged investments. Charitable trust terms require a 20+ year holding period. Depending on your age, an IRA or 401(k) might require up to 40 years before you can withdraw your investment without penalties.

We take reservations from investors on an ongoing basis, and we intend to launch new funds several times per year. We’ll launch new funds each time we’re able to create a diversified pool of stocks that meets our fund managers’ investment objectives.

The reservation process has three simple steps. Once you register your interest, we’d be happy to connect you with an expert who can explain everything in more detail:

1. Register your interest and check your eligibility by telling us a little bit about your situation. There’s no commitment, and it takes less than a minute. Register now →
2. Receive an invitation. When we have enough interest to match your stock with a new fund, we’ll invite you to participate. If you accept your allocation, we’ll collect more information, verify your eligibility, and help you move your stock into a reserve (or escrow) account.
3. Commit and close. Over the last few days before the fund closes, you’ll sign a subscription agreement that finalizes your commitment to the fund. 

When the fund closes, your stock shares will be swapped for a pro-rata share of the fund. Here’s a more detailed view.

To launch a new fund, our fund managers need to identify investors whose stocks can be pooled to approximate the composition of the Nasdaq-100. Typically, that means making allocations for 40 to 80 stocks and weighting them to mimic the holdings in the fund.

It’s a little like putting together a jigsaw puzzle by solving for various metrics quantitatively. 

Sometimes, we’re unable to make allocations for certain investors because we don’t have enough other stocks to balance out their holdings. Certain stocks might not be additive to the fund performance, and we might not consider them.

Once investors have signed off on their contributions, the stocks are pooled in a fund registered as a Delaware Limited Partnership. Our independent third-party fund administrator will set the Net Asset Value for the fund, which helps determine each investor's percentage ownership. Certain qualifying asset investments, such as real estate investments, are made to ensure compliance with the regulatory requirements of an exchange fund.

Fund shares will be issued through our transfer agent and show up on your Cache brokerage account. The fund assets will be held at BNY Mellon, an institution with decades of experience in asset custody.

We institute a two-year lockup on the shares contributed to the fund to discourage short-term investors from participating. The reason: each pool is carefully weighted to achieve certain investment goals, and redemptions hurt your fellow investors. If you have short-term liquidity needs, this investment is not for you.

After two-year lockup period, it is possible to redeem your shares from the fund. However, regulations require a seven-year holding period to gain the full benefits of the exchange fund.

Redemption requests after the lockup but before the seven-year mark are satisfied by distributing your original contribution back to you at a rate that is the lower of the contributed stock value at the time of redemption or the value of your fund shares based on the fund’s net asset value. The rest is retained until term commitments are met. Note that early redemptions incur a 2% penalty fee. Please refer to the fund documents for a full set of redemption terms.

All our Exchange Funds are perpetual-life vehicles, which means they could grow in a tax-deferred manner, even after seven years.

After seven years, however, you may redeem your shares at any time. When you do, we’ll distribute a diversified basket of stocks that matches your ownership percentage and cost basis. We don’t charge any redemption fees.

Like any private funds, such as hedge funds or VC funds, there are no public exchanges for shares in Exchange Funds. Fund shares will be redeemed by Cache only or through the fund administrator in the event that Cache is no longer operational. Fund shares can be transferred through gifts or inheritances.

If you need to access liquidity against your exchange fund shares, we can arrange for you to borrow against your shares.