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Loss Harvesting or Gain Deferral? A Surprising Source of Tax Benefits of Tax-Aware Long-Short Strategies
September 26, 2023
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.
Tax Matters
Now You Don’t Have to Choose Between Diversification and Tax Efficiency
July 18, 2022
The additional requirement for individuals and families is for their diversifying strategies to be attractive not just pre-tax, but also net of taxes.
Tax Matters
Regardless of How You Deal with Low-Basis Stock, Long-Short Strategies Can Help
June 23, 2022
Most investors recognize that concentrated stock holdings are risky, but the outright sale of a low-basis stock incurs a punitive tax burden. In this post, we highlight several tax-efficient alternatives to an outright sale and explore how long/short strategies can help enhance this tax efficiency.
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.
Tax Matters
Why You Might Defer Your Gains, Even When Tax Rates Are About to Increase
November 17, 2021
With the current proposals for (and the future expectations of) various tax rate hikes, investors with appreciated portfolios might feel like sailing into a storm and wondering, is it still better to defer gains if tax rates were to increase?
Tax Matters
The Value of Integrating Income and Estate Planning
September 2, 2021
In this post, we discuss challenges of wealth preservation and growth faced by high net worth families. While a family that invests with income tax and estate tax efficiency in mind is more likely to achieve its financial legacy goals, the numerical advantages of tax efficiency are quite striking. In addition, we show that there is a significant value in integrating income tax efficiency and estate tax planning.
Tax Matters
Does Tax Efficiency Just Delay the Tax Burden?
July 28, 2021
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.
Tax Matters
Improving Direct Indexing: 130/30 and 150/50 Strategies
July 6, 2021
In this post, we expand on our analysis which studies the tax benefits of a hypothetical tax-aware direct indexing strategy with 1% tracking error.