AQR addresses 5 critiques of tax-aware long/short
Illustrations! Numbers! Let's check it out...
AQR wrote a great little article addressing concerns with tax-aware long/short
I’ll take a tiny bit of credit for writing about some of these concerns a few months ago.
I speak with many wealth managers in various stages of diligencing tax-aware long/short.
Some are uncomfortable with leverage and shorting in any form, others are considering the incremental risk and estate planning, and others have used tax-aware long/short strategies (trader funds and separate accounts) for years.
Since AQR published this piece, a few readers have reached out with the following questions:
Portfolio lockup may be delayed, but it’ll happen eventually… right?
Assuming I have to unwind to long-only, what kind of tax alpha can I expect? (“Am I just giving everything back?” is usually how it’s phrased, which misses the point of tax deferral, but these things are nuanced, so I get it)
At death, I must settle margin and shorts, but even with step-up on the portfolio equity, will I face a giant tax bill? Could the tax bill be bigger than my portfolio equity?
Plus several questions that live squarely with the wealth manager:
The “right” percentage of the portfolio to allocate
The “right” amount of leverage: 110/10, 150/50, 250/150, 300/200, etc.
The “right” way to manage the estate, etc.
These are interesting questions that could be answered “correctly” in a number of ways.
My instinct is to answer them: 1) with mathematical modeling and 2) by talking to a lot of folks. So, anyway, stay tuned for that.
Here’s my reaction to AQR’s piece…
