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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.

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.

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.

Interview

Meet the Expert: Nathan Sosner on Tax-Aware Investing

AQR Principal Nathan Sosner explains the basics of tax-aware strategies and why taxable investors should consider them.

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

Should Taxable Investors Shun Dividends?

We evaluate the tax benefit of dividend avoidance for quantitative multi-style strategies and find that dividend avoidance generally reduces implementation efficiency, thus lowering expected pre-tax returns.

White Paper

Understanding the Tax Efficiency of Relaxed-Constraint Equity Strategies

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?

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.