Overview

Taxable investors cannot afford to overlook an important fact: wealth compounds after tax. Taxes can impact a portfolio as much as returns or fees. Now more than ever, investors – many of whom are expecting taxes to rise – are thinking about after-tax returns.

 

Tax laws are complex and change with time. Different considerations apply for different objectives, including preserving and growing wealth, establishing a legacy for future generations and charitable giving. AQR believes that taxable investors have a better chance of meeting their goals when their asset managers take taxes into account. We call this being “tax-aware.”

To learn more about Tax-Aware investing, visit our Learning Center here. 

New Strategies for Taxable Investors

AQR’s tax-aware approach is informed by decades of research and experience managing traditional and alternative investments. Our research has created new possibilities in the areas of:


Tax-Aware Equities

Traditional tax loss harvesting strategies, like passive loss harvesting or direct indexing, generally realize tax benefits during early years of investment or in falling equity markets. AQR’s tax-aware equity strategies address these shortcomings, aiming to deliver larger and more persistent benefits regardless of market direction.

 

Tax-Aware Alternatives

Alternative investments can provide valuable diversification, but they can also be tax inefficient. By combining alternative strategies with tax-aware implementation, our solutions allow investors to access these diversifying strategies in a more tax efficient way. In some cases, tax aware alternatives may even help lower an investor’s overall taxes.

 

Estate Planning

Successful estate planning relies on getting investments, cost, and legal structure right. AQR helps create holistic plans for transferring more wealth, more quickly, and more reliably than traditional estate planning techniques.  

Case Studies

AQR understands the unique challenges faced by taxable investors and partners with clients to create solutions. Working at the intersection of prudent investing, tax, and estate planning, AQR is helping a:

Single Family Office

Rejuvenate the loss harvesting potential of an appreciated equity portfolio

Technology Entrepreneur

Diversify an appreciated single-stock position while offsetting gains from the liquidation of that position

Multi-Family Office

Create a tax-efficient fund-of-funds for its High-Net-Worth clients

 View Case Study Overviews

This list includes historical and proposed solutions for certain of AQR’s clients and prospective clients, selected on the basis of their portfolios or investments including a tax planning component. These examples are provided for informational purposes only and it is not known whether such clients or prospective clients approve or disapprove of AQR or its advisory services.

Research and Expertise

With an approach rooted in academic exploration, we are committed to ongoing education and continued innovation. We combine our experience in trading and portfolio management with knowledge of taxation to help clients potentially achieve superior after-tax returns. We also regularly publish research and insights in our Tax-Aware Learning Center. 
 Read our Tax Matters Posts

Explore our Research

Learn more about AQR's tax-aware approach

Contact Us

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is intended exclusively for the use of the person to whom it has been delivered by AQR, and it is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. 

This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

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. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. 

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. 

 

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. This material is not intended to be marketing. The recipient should conduct his or her own analysis and consult with professional advisors prior to making any investment decisions.

Risks of Tax Aware Strategies (Not Exhaustive)

1. Underperformance of pre-tax returns: tax aware strategies are investment strategies with the associated risk of pre-tax returns meaningfully underperforming expectations.

2. Adverse variation in tax benefits: deductible losses and expenses allocated by the strategy may be less than expected.

3. Lower marginal tax rates: the value of losses and expenses depends on an individual investor’s marginal tax rate, which may be lower than expected for reasons including low Adjusted Gross Income (AGI) due to unexpected losses and the Alternative Minimum Tax (AMT).

4. Inefficient use of allocated losses and expenses: the tax benefit of the strategy may be lower than expected if an investor cannot use the full value of losses and expenses allocated by the strategy to offset gains and income of the same character from other sources. This may occur for a variety of reasons including variation in gains and income realized by other investments, at-risk rules, limitation on excess business losses and/or net interest expense, or insufficient outside cost basis in a partnership.

5. Larger tax on redemption or lesser benefit of gifting: gain deferral and net tax losses may result in large recognized gains on redemption, even in the event of pre-tax losses. Allocation of liabilities should be considered when calculating the tax benefit of gifting. 6. Adverse changes in tax law or IRS challenge: the potential tax benefit of the strategy may be lessened or eliminated prospectively by changes in tax law, or retrospectively by an IRS challenge under current law if conceded or upheld by a court. In the case of an IRS challenge, penalties may apply.

Disclosures
The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR and it is not to be reproduced or redistributed to any other person.Past performance is not a guarantee of future performance.

There can be no assurance that an investment strategy will be successful.

The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.

© 2021 AQR Capital Management, LLC. All rights reserved.