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Working Paper

Loss Harvesting or Gain Deferral? A Surprising Source of Tax Benefits of Tax-Aware Long-Short Strategies

September 26, 2023 - Stanley Krasner Nathan Sosner

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 - Joseph Liberman Stanley Krasner Nathan Sosner Pedro Freitas

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

Tax-Efficient Portfolio Transition: A Tax-Aware Relaxed-Constraint Approach to Switching Equity Managers

March 2, 2020 - Nathan Sosner Stanley Krasner

For a taxable investor with a highly appreciated equity portfolio, replacing the portfolio manager is likely to trigger substantial tax liabilities. We find that a tax-aware relaxed-constraint post-transition strategy significantly outperforms a traditional tax-agnostic long-only strategy in its ability to preserve and grow the investors after-tax wealth over the long term.

White Paper

Understanding the Tax Efficiency of Relaxed-Constraint Equity Strategies

April 5, 2019 - Nathan Sosner Ted Pyne Swati Chandra

A guide to tax-aware relaxed constraint strategies that also tries to enlighten investors on the nuances around tax benefits by comparing different tax-aware strategies with an equity beta of one.

Journal Article

The Tax Benefits of Relaxing the Long-Only Constraint: Do They Come from Character or Deferral?

October 15, 2018 - Nathan Sosner Stanley Krasner Ted Pyne

Are there tax benefits from relaxation of the long-only constraint? If so, what are the sources? To answer these questions, we decompose the total tax benefit (or liability) of a strategy into two components.

White Paper

Understanding Relaxed Constraint Equity Strategies

February 3, 2017 - Ing-Chea Ang Alex Michalka

In this paper, we discuss how Relaxed Constraint (RC) strategies work, some common misconceptions about the strategy especially relative to Long/Short equity strategies, and considerations in evaluating RC managers.

Alternative Thinking

Relaxed-Constraint Portfolios

2Q 2016 - AQR Capital Management

Active equity investors may increase expected portfolio returns by relaxing the long-only constraint. The investment community has largely turned away from strategies that short bad stocks, but we find that they may want to take a renewed look.

White Paper

Loosening the Long-Only Leash

January 1, 2008 - Adam Berger

For many investors, "relaxed-constraint” strategies may be a more realistic option than hedge funds. They offer many benefits of hedge funds and fewer practical impediments, particularly for investors who already use traditional active management.