Ways to raise liquidity, compared.

There are six main ways to raise liquidity from a securities portfolio: a Lombard loan, an outright sale, a brokerage margin loan, a hedge such as a zero-cost collar, a prepaid variable forward, or an exchange fund. They differ in whether you keep the position, the recourse you take on, how fast they move, what has to be disclosed, and how the proceeds can be used. No single route is best; the right one depends on your objective.

Six ways to raise liquidity

There are six routes for a holder who wants cash from a substantial position, or less exposure to it: a Lombard loan, an outright sale, a brokerage margin loan, a zero-cost collar or hedge, a prepaid variable forward, or an exchange fund. The instinctive answer, selling some, is only one of the six and often not the best.

The other routes keep some of the position’s exposure in place, to different degrees and for different reasons. Understanding what each route does, and what it costs in control and obligation, is the difference between a decision and a reflex.

Route 1: Lombard loan

A Lombard loan advances cash against a pledge of the portfolio. You keep ownership, the dividends, the voting rights, and the upside; you draw a fraction of value — the loan-to-value — and repay over an agreed term. The recourse profile is negotiable, custody is with a qualified custodian, and no disposal occurs. It is the route for a holder who wants liquidity and wants to keep the position, including a concentrated one, provided the shares are freely tradable.

Route 2: Outright sale

A sale is the most complete form of liquidity: it converts the position fully into cash, with no interest and no ongoing obligation. But it ends the position, hands the future upside to the buyer, and is a disposal — which may crystallise tax and, for a large or insider holding, may have to be signalled to the market.

A sale is cleanest when you have no reason to keep the shares and no tax or disclosure cost to realising them. The trade-off against borrowing is set out on borrow against shares without selling. Selling and buying back later has costs of its own, weighed in Lombard loan vs selling and rebuying.

Route 3: Brokerage margin loan

A margin loan lends against the securities in a brokerage account. It is quick and flexible for an active trader, but standardised: it is full-recourse, open-ended, and marked continuously against the broker's maintenance requirements, so a fall in the collateral can bring a margin call or forced sale at short notice. It keeps the position, but on terms the borrower does not control. The differences from a Lombard loan are drawn out on Lombard vs margin vs stock loan.

Where a broker will not lend against a holding, the alternatives are set out in when your broker won’t lend against your shares.

Route 4: Zero-cost collar or hedge

A zero-cost collar is not a loan at all — it is a hedge. It brackets a share price by buying a downside put and selling an upside call, structured so the premiums roughly offset. It protects against a fall while capping the gain, and by itself raises little or no cash. Its role in a liquidity plan is indirect but useful: by protecting the collateral, a collar can support a higher advance on a loan against the same position. Think of it as risk management that can unlock, rather than deliver, liquidity.

Route 5: Prepaid variable forward

A prepaid variable forward pays the holder a fixed sum now in return for delivering shares, or their cash value, on a set future date. The number of shares due is set by a formula and falls as the share price rises within a range, so the holder keeps part of any gain while the counterparty bears any fall below an agreed price. The holder takes on a delivery obligation rather than a debt.

In Rev. Rul. 2003-7 (February 2003), the IRS ruled that a holder who received a fixed amount of cash and agreed to deliver a number of shares that varied significantly with the price on the delivery date had neither sold the shares currently nor made a constructive sale under section 1259 of the Internal Revenue Code.

The ruling rested on its facts: the holder pledged the maximum number of shares that could be due, had an unrestricted right to settle in cash or other shares, and was not economically compelled to deliver the pledged shares. The IRS said a different outcome may be warranted where a holder is legally or economically compelled to deliver them. Whether another contract falls within the ruling needs US tax advice; outside the US, check with local counsel.

Route 6: Exchange fund

An exchange fund lets a holder swap a concentrated position for a share of a diversified pool instead of selling it. Several holders contribute shares and each receives an interest in the combined portfolio. The holder diversifies, but gives up the single position and raises no cash.

Where the fund is a partnership for US tax purposes, section 721(a) of the Internal Revenue Code provides that no gain or loss is recognised on a contribution of property to a partnership in exchange for an interest in it. Section 721(b) disapplies that rule for gain on a transfer to a partnership that would be treated as an investment company, within the meaning of section 351, if it were incorporated.

That exception turns on what the fund holds. One Eaton Vance fund that took contributions of stock described, in its annual report for 2003, investing part of its assets in real estate so that contributions of appreciated stock would not be taxed. Exit terms are set by each fund’s documents. Whether a contribution is tax-free needs US tax advice; outside the US, check with local counsel.

The six routes, compared

A Lombard loan keeps the position and raises cash; a sale ends it; a margin loan is standardised and full-recourse; a collar manages risk but raises little cash; a prepaid variable forward pays cash now for a later delivery; an exchange fund diversifies without raising cash. The first table sets routes one to four side by side across the dimensions that decide between them.

The second table, on the same rows, covers routes five and six. Read both as a framework, not a recommendation: the right choice depends on your objective, your holding, and your tax and disclosure position.

Framework only. Not investment, legal, or tax advice, and not an offer. Disclosure and tax outcomes depend on the jurisdiction, the holding, and your circumstances.

Which route fits when

Sell when you want out and can bear the disposal; take a margin loan as an active trader comfortable with continuous margining; use a collar when protection matters more than cash; and take a Lombard loan for liquidity while keeping a position, especially a concentrated or strategically important one. The routes also combine, and the best answer is sometimes a blend.

A prepaid variable forward fits when cash now and protection on price matter more than the full upside, and an exchange fund when the aim is diversification rather than cash. Both turn on tax treatment, so they need tax advice before anything is signed: US advice for a US holder, and local counsel elsewhere.

For the amount a loan could raise, see how much you can borrow against shares; for what it costs, see Lombard loan interest rates and costs. Borrowing that does not use the portfolio, against a home or unsecured, is compared in Lombard loan vs HELOC vs personal loan.