Partnership Allocations and Their Effects on Tax-Aware Fund Investors

The Journal of Wealth Management, Summer 2018, 21 (1) 8-17; DOI: 10.3905/jwm.2018.21.1.008

22 Pages Posted: 13 Nov 2017 Last revised: 24 Jun 2019

See all articles by Nathan Sosner

Nathan Sosner

AQR Capital Management, LLC

Philip Balzafiore

AQR Capital Management, LLC

Zhenduo Du

AQR Capital Management, LLC

Date Written: February 28, 2018

Abstract

Limited partnerships are attractive investment vehicles for investors because, as limited partners, investors cannot lose more than their invested capital despite the leverage of the partnership’s portfolio. Consistent with this, the availability of tax losses to a limited partner is also more limited as compared to a separate account investor. Understanding this limitation is particularly important for investors in tax-aware funds which tend to allocate net tax losses. In addition, investors in funds structured as limited partnerships are affected by laws and regulations governing partnership allocations of gains and losses realized by the fund portfolio. This study outlines certain relevant principles of “securities partnership” accounting and shows how these principles apply to investing in tax-aware funds structured as limited partnerships. We argue that the laws and practices of partnership accounting can align tax results with the economic outcomes of the investors and ensure that new investors do not materially suffer from unrealized gains accumulated in a tax-aware fund. Our conclusions are illustrated with a simple stylized model.

Keywords: Taxation, Limited Partnership, Tax Aware, Tax Managed, Securities Partnership, Partnership Accounting, Partnership Allocations, Tax Allocations, Partner Outside Basis

JEL Classification: G23, G28, H20, H24, K34

Suggested Citation

Sosner, Nathan and Balzafiore, Philip and Du, Zhenduo, Partnership Allocations and Their Effects on Tax-Aware Fund Investors (February 28, 2018). The Journal of Wealth Management, Summer 2018, 21 (1) 8-17; DOI: 10.3905/jwm.2018.21.1.008. Available at SSRN: https://ssrn.com/abstract=3068247 or http://dx.doi.org/10.2139/ssrn.3068247

Nathan Sosner (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Philip Balzafiore

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Zhenduo Du

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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