Alternative Thinking

Yield Floors and Asset Allocation: When Is the Role of Bonds Impaired?

We explore how different levels of a so-called “floor” for bond yields would affect the return generation and diversification properties of bonds. We find that only very restrictive yield floor assumptions would have the potential to materially impact the role of bonds in a portfolio over the next year.

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Fixed Income

What Drives Bond Yields?

In this overview of the various factors that influence government bond yields, we show that both in theory and in the data, non-monetary policy factors drive significant variation in yields, particularly at longer maturities. Despite the exceptionally low yield environments we have witnessed, fundamentals continue to drive bond markets.

Tax Aware

Improving Direct Indexing: 130/30 and 150/50 Strategies

In this post, we expand on our analysis which studies the tax benefits of a hypothetical tax-aware direct indexing strategy with 1% tracking error.

Tax Aware

Direct Indexing and the Proposed Biden Tax Plan

There are two basic ways to invest in a stock market index: you can buy an index fund, or you can directly buy a stock portfolio that tracks the index. If you are a taxable investor, a benefit of the direct approach is that you can harvest losses on individual positions. But how high are those benefits—and what happens to them under the proposed Biden Tax Plan?

Tax Aware

Tax-Efficient Portfolio Transition, or How to Rejuvenate Ossified Equity Portfolios

We discuss portfolio transition techniques that could alleviate the tax costs of switching managers for a taxable investor.

Alternative Investing

The Tax Benefits of Direct Indexing

An investor holding a direct indexing portfolio can obtain tax benefits by harvesting losses on individual stock positions. We show that investors with allocations to hedge funds and derivatives are the most likely category of investors to have systematic short-term capital gains in their portfolios and, therefore, benefit the most from losses harvested by direct-indexing strategies. We show how tax benefits are affected by equalizing the tax rate applicable to long-term and short-term capital gains.

Tax Aware

“The Tax Benefits of Separating Alpha from Beta” Wins the 2020 Graham and Dodd Top Paper Award

In this paper, we tackle a different practical question: In a world dominated by tax-agnostic managers, how can investors design their tax-agnostic strategy allocations to improve the tax efficiency of their overall investment portfolios?

Quick Clips: Tax Aware Alternatives

Hear from Ted Pyne, Head of AQR’s U.S. Wealth Group, on the potential benefits of tax aware alternatives for U.S. taxable investors.

Factor/Style Investing

Is There a Replication Crisis in Finance?

Several papers argue that financial economics faces a replication crisis because many studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions, including finding the majority of asset pricing factors can be replicated.

Tax Aware

Limitation on Trader Fund Losses under the CARES Act of 2020

We explain how hedge fund investors might be affected by a limitation on excess business losses codified in recent tax legislation. In order to allocate business losses a hedge fund now must be a trader fund. After explaining the relationship between hedge fund losses and business losses, we illustrate with simple examples how the new provisions may affect hedge fund investors.

Trading

Game On: Social Networks and Markets

This paper studies how echo-chamber effects and fake news can lead to disagreement and misinformation with effects on investors’ portfolios and market prices. It presents a model how an investment idea can propagate through a social network, generating a trading frenzy with high turnover, a bubble in the price, and high price volatility. The paper also presents empirical evidence on the dramatic events related to the GameStop stock in January 2021 and discusses broader economic implications.