The natural instinct is to sell and diversify. But selling comes with drawbacks: significant capital gains taxes, signaling risk if you’re a corporate insider, or even restrictions during trading windows. Fortunately, there are sophisticated alternatives that allow you to reduce risk, preserve upside potential, and defer taxes — all without selling a single share.

This guide explores three of the most powerful tools for executives and high-net-worth investors to de-risk concentrated equity without triggering immediate tax consequences: protective puts, collars, and exchange funds.

Why Concentration Is Riskier Than It Seems

Concentration isn’t inherently bad — it’s how many fortunes are built. But it becomes a double-edged sword once your wealth is tied too closely to one company’s fate. Consider:

• Single-stock volatility: Even strong companies can see 30–50% drawdowns in market corrections.
• Correlation with career risk: If your income and net worth are tied to the same company, a downturn can hit both simultaneously.
• Tax and liquidity constraints: Large positions often have low cost bases, making liquidation costly.
• Psychological traps: Emotional attachment or loyalty bias often leads to inaction, increasing long-term risk.

The goal of any de-risking strategy is simple: maintain as much upside potential as possible while protecting against catastrophic downside — without triggering unnecessary taxes.

1. Protective Puts: Downside Insurance Without Selling

A protective put is one of the most straightforward and powerful hedging tools available to equity holders. Think of it as insurance for your stock.

How It Works

A protective put involves purchasing a put option on your company stock. This option gives you the right — but not the obligation — to sell your shares at a predetermined “strike price” within a specific time period.

• If the stock falls below the strike price, you can sell at the strike, effectively limiting your losses.
• If the stock rises above the strike price, the option expires worthless, and you keep the upside.

Example

Suppose you own 100,000 shares of company stock currently trading at $100 per share — a $10 million position. You buy 12-month put options with a strike price of $90 for $5 per share.

• If the stock falls to $60, you still have the right to sell at $90, limiting your downside to ~10%.
• If the stock rises to $130, your puts expire worthless, but you participate fully in the upside.

Key Benefits

• Downside protection: Puts create a price floor, shielding you from catastrophic losses.
• No sale, no tax: Since you haven’t sold your stock, there’s no capital gains event.
• Flexibility: You choose the strike price and duration, customizing the risk profile.

Considerations

• Cost: Like insurance, puts require an upfront premium, which can range from 2% to 10%+ of the position annually.
• Time decay: Puts lose value over time (known as “theta decay”), so long-term hedges must be renewed.
• Liquidity: For less liquid stocks, options markets may be limited or expensive.

Protective puts are ideal for executives who want strong downside protection while retaining unlimited upside, and who are willing to pay a premium to achieve it.

2. Collars: Capping Upside to Eliminate Hedging Costs

While protective puts are effective, the cost can be significant — especially for large positions. A collar strategy eliminates or greatly reduces that cost by pairing the put with a covered call.

How It Works

A collar involves two simultaneous actions:

1. Buy a put option to protect against downside risk.
2. Sell a call option on the same stock to generate income that offsets the cost of the put.

The trade-off: by selling a call, you agree to sell your shares if the price exceeds a certain level (the call’s strike price), which caps your upside.

Example

You hold the same $10 million stock position at $100/share. You buy 12-month $90 puts for $5/share and sell $120 calls for $5/share. The call premium offsets the cost of the puts, making the hedge cost-neutral.

• If the stock falls to $60, your puts allow you to sell at $90, limiting your loss.
• If the stock rises to $150, you must sell at $120 — capping your gain but still realizing significant upside.

Key Benefits

• Cost-efficient: A collar can be structured at little to no net cost.
• Risk reduction: Downside protection remains intact.
• Tax deferral: Because no shares are sold upfront, capital gains are deferred.

Considerations

• Upside cap: Your maximum gain is limited by the call strike price.
• Trading restrictions: Insider trading windows and company policies may restrict collar implementation.
• Complexity: Collars require precise structuring and monitoring to avoid unintended tax or liquidity consequences.

Who it’s for: Executives who prioritize downside protection over unlimited upside and who prefer a cost-neutral hedge.

3. Exchange Funds: Diversification Without a Sale

While options-based strategies are ideal for hedging, they don’t solve the diversification problem. If you want to significantly reduce company-specific risk without selling, an exchange fund can be a powerful solution.

What Is an Exchange Fund?

An exchange fund is a private investment vehicle — typically offered by major financial institutions — that pools concentrated stock positions from multiple investors. Each participant contributes shares, and in return, they receive a pro-rata interest in the diversified pool.

Because the contribution is structured as a like-kind exchange, you defer capital gains taxes and immediately achieve diversification — all without selling your stock.

Example

You contribute $10 million worth of Company A stock to an exchange fund. The fund pools contributions from investors holding Company B, C, D, and so on. After a set holding period (usually 7 years), you redeem your interest and receive a diversified basket of stocks rather than just Company A.

Key Benefits

• Immediate diversification: Your single-stock risk is dramatically reduced without a sale.
• Tax deferral: Capital gains taxes are deferred until the final distribution.
• Estate planning advantages: Exchange fund shares can be transferred or used in estate planning strategies.

Considerations

• Illiquidity: Most exchange funds require a 7-year lock-up period.
• Minimum investment: Typically $1 million or more.
• Qualified investors only: These are generally limited to accredited or high-net-worth investors.
• Diversification limits: Some funds may still have sector or market-cap biases.

Who it’s for: Investors with very large, highly appreciated positions who want long-term diversification without triggering taxes.

Combining Strategies for Maximum Impact

These strategies are not mutually exclusive — in fact, many executives use two or more together as part of a comprehensive plan:

• 🛡️ Protective Put + Exchange Fund: Protect near-term downside while preparing to diversify long term.
• 📉 Collar + Charitable Remainder Trust (CRT): Use a cost-neutral hedge while planning a tax-advantaged charitable exit.
• 🔄 Exchange Fund + 10b5-1 Plan: Diversify a portion while systematically selling the remainder over time.

The most effective approach often involves layering tools to balance risk, tax efficiency, liquidity, and time horizon.

Key Decision Factors to Guide Your Strategy

When evaluating which tool is best, consider these advanced planning factors:

1. Time Horizon:

   • Short-term risk management → Puts or collars
   • Long-term diversification → Exchange funds

2. Tax Sensitivity:

   • Avoiding current gains → All three strategies qualify
   • Long-term step-up planning → Consider estate and charitable strategies

3. Liquidity Needs:

   • Near-term cash requirements → Collars with call assignment potential
   • No immediate liquidity needs → Exchange fund or protective puts

4. Risk Appetite:

   • High downside protection priority → Protective puts
   • Balanced protection with cost control → Collar
   • Diversification over growth → Exchange fund

Final Thoughts: Concentration Is a Choice, Not a Destiny

Holding concentrated equity is a powerful wealth-building strategy — but it’s also a concentrated risk. The traditional approach of “just sell and diversify” is often neither tax-efficient nor strategically optimal for high-net-worth executives and insiders.

With the right combination of protective puts, collars, and exchange funds, you can:

• Protect your wealth from catastrophic losses
• Maintain meaningful upside potential
• Achieve diversification without triggering capital gains
• Preserve optionality for estate, philanthropic, or liquidity planning

The key is intentionality. These tools are complex, require careful structuring, and should be tailored to your specific financial plan, tax profile, and corporate restrictions. Working closely with a financial advisor, tax strategist, and legal counsel ensures that you don’t just hedge your risk — you strategically manage it.