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Working Paper
Levering Up to Do Good: Direct Long-Short Investing and Charitable Giving
April 23, 2024
We use historical strategy simulations to evaluate the advantages of donating appreciated stock in the context of tax-aware long-short factor strategies. We find long-short strategies exhibit several advantages over long-only investments.
Working Paper
Combining VPFs and Tax-Aware Strategies to Diversify Low-Basis Stock
March 7, 2024
We illustrate how combining VPFs (variable prepaid forwards) with tax-aware strategies can help diversify low-basis stock and thereby improve after-tax wealth accumulation. Long-run after-tax wealth outcomes are significantly better when a VPF is combined with tax-aware long-short factor strategies rather than with other alternatives, such as a direct-indexing strategy or a market index fund.
Journal Article
Loss Harvesting or Gain Deferral? A Surprising Source of Tax Benefits of Tax-Aware Long-Short Strategies
Summer 2024
We explore the mechanism for how tax-aware long-short factor strategies, within their first three years since inception, can realize cumulative net capital losses exceeding 100% of initially invested capital, all while generating a significant pre-tax alpha – a result shown in previous research. Surprisingly, we find in these strategies that net capital losses arise not from an increased realization of capital losses but rather from the deferral of capital gains, especially short-term gains on long positions.
Journal Article
Beyond Direct Indexing: Dynamic Direct Long-Short Investing
May 3, 2023
On average, net losses realized by direct indexing loss-harvesting strategies taper off within the first few years after their inception, and these strategies also exhibit a high dispersion of net loss outcomes. We show that long-short strategies motivated by factor investing can significantly outperform direct indexing strategies from both a pre-tax and tax perspective.
Journal Article
When Fortune Doesn’t Favor the Bold: Perils of Volatility for Wealth Growth and Preservation
May 12, 2022
Entrepreneurs and executives holding much of their wealth in a highly appreciated single stock face either the high risk of idiosyncratic volatility and potentially catastrophic losses, or selling stock and facing an immediate, punitive tax burden. This paper evaluates this choice and explains how it relates to classic betting strategies and economic theory, finding tax-efficient techniques might strike the balance between the urgency to diversify concentrated risk and aversion to taxes.
Journal Article
Taxes, Charity, and Hedge Funds: Tax Implications of Charitable Contributions of Leveraged Partnership Interests
January 10, 2022
As a result of recent Treasury regulations, investors in investment partnerships, such as hedge funds, might end up recognizing capital gains when they contribute their partnership interests to a charity. We explain how such taxable gains upon charitable contributions arise and quantify how punitive they might be.
Journal Article
The Tax Benefits of Direct Indexing: Not a One-Size-Fits-All Formula
May 7, 2021
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.
Journal Article
Limitation on Trader Fund Losses under the CARES Act of 2020
March 3, 2021
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.
Journal Article
Integration of Income and Estate Tax Planning
September 1, 2020
Preservation and transfer of wealth to future generations is one of the central financial goals for most high-net-worth families. We show that a family that invests with income and estate tax efficiency in mind can achieve substantially higher wealth levels than a family oblivious to taxes.
White Paper
Understanding a Tax-Aware Defensive Equity Long-Short Strategy
April 17, 2020
We describe a hypothetical Tax-Aware Defensive Equity Long-Short strategy, including its construction and pre-tax and after-tax performance. The strategy closely replicates the pre-tax performance of a similar hypothetical tax-agnostic strategy and has the potential to achieve a meaningful tax benefit for a taxable investor.