Tax-aware long/short: new entrants and innovation
As the table stakes rise, so should the quality of play?
This article is educational content, not investment, tax, or legal advice. It is not an endorsement of any of the mentioned products. Read each prospectus carefully. Hire an adviser or tax attorney for personalized guidance.
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Tax-aware long/short: new entrants and innovation
I recently updated my tax-aware long/short market map (see below), which includes nearly every manager I can find originating a product that advisers and individuals can use.
I think of tax-aware long/short (things like 130/30, 200/100, 250/150) as planning products.
But as my pal at Brooklyn Investment Group, Erkko Etula, likes to say, a tax-aware long/short strategy…
Fees: 10s of basis points
Total costs, tracking error, alpha objective: 100s of basis points (i.e. 1%+)
Cumulative capital losses: 10,000s of basis points (e.g. 100%+ after 10y)
For comparison, direct indexing is more like…
Fees: 10s of basis points
Tracking error: 100s of basis points (i.e., ~1%)
Cumulative capital losses: 1,000s of basis points (i.e., ~30% after 10y)
For Erkko’s sake, this is not a direct quotation, and it would be more accurate to say I’m paraphrasing, qualifying, and caveating. But he was the inspiration for the order-of-magnitude estimates, which I’ve carried around with me for a year+ now.
These estimates can vary substantially depending on implementation, volatility regime, seed portfolio, leverage, beta, and many other variables, so ask the manager for their experience, backtesting results, and track error to understand what you can expect.
The salient point is that tax-aware long/short takes every category (costs, tracking, losses) up a notch. In some cases, a whole order of magnitude. But, again, verify with them.
Okay, let’s talk about the market map and new entrants.
