Tax Aware

The Tax Benefits of Separating Alpha from Beta

Topics - Tax Aware

${ numberSection } ${ text }
The Tax Benefits of Separating Alpha from Beta

Separating active returns (i.e., alpha) from market exposure (i.e., beta) has recently received significant attention in the investment community. Whereas most of the focus has been on pre-tax returns, we show that the separation of a portfolio into an active long-short portfolio and a passive index portfolio can have significant tax benefits. The turnover of a traditional active strategy causes capital gain realizations on both the active and the market components of the strategy returns. In contrast, the turnover of a strategy that separates alpha from beta is aimed at the active exposures and enables the deferral of capital gain realizations on the passive market exposure.


AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.

 

Diversification does not eliminate the risk of experiencing investment loss.

 

Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.