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How do early redemptions affect risk and the balance within the portfolio?
How do early redemptions affect risk and the balance within the portfolio?
Updated over a week ago

In the structure of the Cache Exchange Fund, several mechanisms are in place to disincentivize early redemptions and encourage long-term participation:

  1. Lockup Periods: Our funds typically impose a lockup period of two years, during which investors cannot redeem their shares. This restriction helps ensure stability in a fund's assets and discourages short-term investment strategies.

  2. Redemption Fees: Cache imposes a 2% penalty fee for early redemptions before the standard seven-year holding period. This fee directly reduces the financial benefit of an early exit, serving as a deterrent against premature withdrawals.

  3. Limited Redemption: Investors who redeem early can only receive their original stocks back, but the amount they receive is based on the lower of: 1) the current value of the shares they contributed to the exchange fund or 2) the current value of their share of the exchange fund.

  4. Tax Efficiency: Investors redeeming early would essentially be reset back to square one after several years in the exchange fund, thus losing out both the tax benefits of the exchange fund and any outperformance of the stocks they contributed.

These structures are designed to promote stability within the fund and align investor interests with the fund’s long-term investment goals, thereby mitigating the risks and costs associated with high turnover and frequent redemptions.

Our Investments Team also has some ability to rebalance if early redemptions or changing market conditions interfere with the fund’s diversification goals.

See more about how exchange funds work.

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