Tax-aware long/short: "Not enough focus on the end game"... until now
Tax-aware long/short is a powerful tool that needs a "planning envelope"
Before getting into tax-aware long/short and estate planning…
Andre and I are back on LinkedIn Live this Thursday.
It is just like watching TV… on LinkedIn.
Tax-aware long/short is transformative
Tax-aware long/short strategies (like the 130/30, 200/100, 300/200, etc.) represent the most transformative advancement in tax-aware investing in decades.
If you need a refresher, the value of tax-aware long/short is pretax alpha plus substantial tax-loss harvesting potential.
These images from AQR’s research help make the case (truncated for brevity, please see the paper for assumptions and more detail):
Direct indexing mean harvested losses are 28% after 10 years.
AQR’s 150/50 tax-aware long/short strategy mean harvested losses are ~130% after 10 years (the 200/100, and 250/150 strategies capture more losses).
What do you think?
I’ve been investigating the nuances for the past year, but I’m curious what you think…
More focus on the end game
Tax-aware long/short is a sophisticated tool.
Lately, I’ve been obsessing over estate planning for tax-aware long/short strategies.
I call the end-to-end management of any strategy a “planning envelope.”
So, here’s a work-in-progress table with several estate planning considerations for tax-aware long/short investors.
The first decision is whether to settle the strategy at death or to continue the strategy for the benefit of heirs.
I'll also reference AQR's work, which quantifies how a portfolio's built-in gains are impacted by the step-up in basis that occurs upon an investor's death.
In any event, this work is dense and interesting (“mysterious and important?”) and requires shifting estate planning into the present.
This is just a preview of my work at the intersection of tax-aware long/short and estate planning, so stay tuned for (much) more.
If you have first-hand knowledge of the intersection of tax-aware long/short and estate planning, please say hello. I’m putting together a cookbook of common patterns and would love your input.
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