Tax alpha bulletin board…
🎉 Basis Northwest is my taxable wealth conference. It’s in Seattle in 2026.
📗 The Adviser’s Guide to Seeding an ETF In-Kind… I have 1 physical copy left
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A trader fund is a hedge fund
I write a lot about tax-aware long/short separately managed account strategies.
Here’s a very short refresher on tax-aware long/short SMAs.
The value prop is pretax alpha and copious capital losses. See AQR’s research showing direct indexing may produce an average of “just under 30%” in cumulative net capital losses after 10 years, while a 150/50 tax-aware long/short separate account produces an average of about 130% in cumulative net capital losses over the same stretch.
That’s tax-aware long/short separate managed accounts.
There’s a complementary strategy, usually only available to accredited investors who are also qualified purchasers1, using hedge funds with trader status.
I say complementary because I know many advisers who use tax-aware long/short SMAs and tax-aware trader funds (which usually also use long/short strategies, to some extent, under the hood) for the same households.
Why?
Under the right circumstances and subject to certain limitations2, trader funds pass ordinary business losses to their investors, which can offset wages.
But, there’s more.
Trader fund fees, as well as other expenses and ordinary losses, can offset income from trade or business and, up to a safe harbor amount, income from wages and investor activities. Moreover, if a trader fund makes a Section 475(f) election for some of its activities, net economic losses from such activities are marked-to-market and become an ordinary deduction as well.
AQR “Limitation on Trader Fund Losses under the CARES Act of 2020” (AQR 2020)
There are several things to keep in mind when investing in a trader fund.
First, a “trader fund” is not necessarily a “trader in securities,” though they are related.