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Tax Matters

Making VPFs Work Harder for You

There is a range of solutions aimed at reducing the risk of concentrated stock tax-efficiently: completion portfolios, exchange funds, charitable giving, just to name a few. But for some investors, Variable Prepaid Forwards (VPFs ) are a favorite. It’s not hard to see why.

Tax Matters

The Enduring Appeal of Gain Deferral, Part 1

We find that strategies that help defer gains can be highly beneficial, irrespective of the investment horizon and especially over the long term.

Journal Article

Taxes, Charity, and Hedge Funds: Tax Implications of Charitable Contributions of Leveraged Partnership Interests

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.

Tax Matters

Does Tax Efficiency Just Delay the Tax Burden?

We often hear the sentiment that tax-efficient investing just delays the inevitable: Eventually, a day will come when the tax-efficient investor will have to true up on years of deferred taxes. And, with the proposed Biden Tax Plan sending many investors scrambling to plan for higher taxes, we feel that now is as good a time as any to put this long-standing myth to bed.

Journal Article

The Tax Benefits of Direct Indexing: Not a One-Size-Fits-All Formula

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

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

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.

Journal Article

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

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.

Journal Article

Lot Layering: The New Frontier for Hedge Fund Partnership Allocations

Despite its unavoidable deficiency caused by current regulations, we believe that lot layering aligns tax and economics more closely than any of the “aggregation” methods presently used by most hedge funds.

Journal Article

Partnership Allocations and Their Effects on Tax-Aware Fund Investors

We discuss certain accounting principles relevant for investors in tax-aware funds structured as limited partnerships. We present a simple stylized model that illustrates that under such accounting principles new investors do not materially suffer from unrealized gains accumulated in a tax-aware fund.