For executives and founders who have gotten rich off one stock, sometimes it is possible to have too much of a good thing.

While the tech stock boom has meant a windfall for employees at high-flying companies, it’s risky to have too much of your net worth tied up in one stock. Some advisors ascribe to a 10% rule of thumb — meaning no one stock or asset should make up more than 10% of a portfolio.

“It represents both the biggest risk and biggest opportunity for that client,” said Rob Romano, head of capital markets investor solutions at Merrill.

Founders and long-time employees who want to diversify their portfolios can face steep capital gains taxes when they sell long-held stock in order to reinvest. Instead, they can contribute their shares to an exchange fund (not to be confused with ETFs).

Exchange funds, also known as swap funds, pool shares from multiple investors, who receive a partnership interest or share of the fund. After a designated lock-up period — usually seven years — investors can redeem their shares for a diversified basket of stocks equal to their interest in the fund.

While exchange funds became mainstream in the ’70s, they’ve gained more popularity of late as the stock market puts up strong returns, boosted in particular by the rise of artificial intelligence.

Eric Freedman, chief investment officer of Northern Trust’s wealth management business, said the many publicly held tech companies are ramping up their equity compensation to compete with hot AI startups for talent.

Exchange funds generally hold 80% of their assets in stocks and aim to mirror benchmark indexes like the S&P 500 or Russell 3000. The remaining 20% is required by the Internal Revenue Service to be held in non-security assets, with real estate being the most popular option.

Steve Edwards, senior investment strategist for Morgan Stanley’s wealth division, said he is seeing clients increasingly use exchange funds as a wealth transfer strategy.

“What exchange funds are helping us to do is to narrow the range of outcomes because a single stock will have a very wide range of outcomes,” he said. “Imagine you’re 70 years old, and you have a stock that’s been amazing, but then it becomes a dumpster fire and, essentially, you are not be able to pass to your heirs the legacy that you were hoping to.”

Still, getting clients to hedge their bets is often a hard proposition, Edwards said.

“People remember the blessing the stock has been to them and their family, and they’re extrapolating forward that the blessing will continue,” he said. “What we found in our research and our work is that stocks that have outperformed actually tend to underperform more in the future.”

Clients usually contribute only a portion of their shares to an exchange fund to take some chips off the table, he said.

Exchange funds only accept accredited investors worth more than $1 million or with more than $200,000 in earned income in the past two calendar years.

And, the lock-up period comes with fine print: If an investor redeems before seven years, they lose the tax benefit and may incur steep fees. Instead of receiving a diversified basket of stocks, the investor typically gets back their original shares — up to the value of their interest in the fund.

Scott Welch, chief investment officer at multi-family office Certuity, said he advises against exchange funds because of the lock-up period. There are more flexible ways to de-risk, such as collars, variable prepaid forwards, or tax-loss harvesting with long and short positions, he said. If liquidity is the client’s primary goal, borrowing against the stock is another solid option.