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Tax Matters

Improving Direct Indexing: 130/30 and 150/50 Strategies

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.

Tax Matters

Direct Indexing and the Proposed Biden Tax Plan

There are two basic ways to invest in a stock market index: you can buy an index fund, or you can directly buy a stock portfolio that tracks the index. If you are a taxable investor, a benefit of the direct approach is that you can harvest losses on individual positions. But how high are those benefits—and what happens to them under the proposed Biden Tax Plan?

Tax Matters

Tax-Efficient Portfolio Transition, or How to Rejuvenate Ossified Equity Portfolios

We discuss portfolio transition techniques that could alleviate the tax costs of switching managers for a taxable investor.

Working Paper

The Tax Benefits of Direct Indexing

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.

Tax Matters

“The Tax Benefits of Separating Alpha from Beta” Wins the 2020 Graham and Dodd Top Paper Award

In this paper, we tackle a different practical question: In a world dominated by tax-agnostic managers, how can investors design their tax-agnostic strategy allocations to improve the tax efficiency of their overall investment portfolios?

Working Paper

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.

Perspective

Now There's Nothing Certain But Death

Over the last few years, we’ve built a considerable effort in tax-optimized investing. Admittedly, this was a little bit of a “if we build it, they will come” venture, given many taxable investors seem to ignore after-tax returns. Thus, it is gratifying to see my AQR colleagues win the Top Graham and Dodd Award for their research on tax optimization, a topic that I’ve long thought deserved a much more prominent place in asset management.

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.

White Paper

Understanding a Tax-Aware Defensive Equity Long-Short Strategy

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.

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.