The Tax Benefits of Separating Alpha from Beta
50 Pages Posted: 25 May 2018 Last revised: 13 Nov 2018
Date Written: November 12, 2018
We show that separating active returns (i.e., alpha) from market exposure (i.e., beta) can have significant tax benefits. An investment strategy that separately invests into a passive index portfolio and an actively-managed long-short portfolio is more tax-efficient than a long-only actively-managed strategy with similar risk and style exposures. The turnover of a traditional active strategy causes capital gain realizations on both the active and the passive portfolio components. In contrast, the turnover of a strategy that separates alpha from beta is concentrated on the active long-short component and enables the deferral of capital gain realizations on the passive market component.
Keywords: Alpha-Beta Separation, Portable Alpha, Active Management, Long-Short, Long-Only, Tax Efficiency, After-Tax Performance
JEL Classification: G11, H21, H24
Suggested Citation: Suggested Citation