The Tax Benefits of Separating Alpha from Beta

55 Pages Posted: 25 May 2018 Last revised: 10 Dec 2019

See all articles by Joseph Liberman

Joseph Liberman

AQR Capital Management, LLC

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Nathan Sosner

AQR Capital Management, LLC

Lixin Wang

AQR Capital Management, LLC

Date Written: December 12, 2019

Abstract

We show using both simulated and historical data 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. Separating alpha from beta is an approach to tax efficiency that is different from systematic tax management described in the literature. It can provide a practical solution for taxable investors in a world dominated by tax-agnostic managers.

Keywords: Alpha-Beta Separation, Portable Alpha, Active Management, Long-Short, Long-Only, Tax Efficiency, After-Tax Performance

JEL Classification: G11, H21, H24

Suggested Citation

Liberman, Joseph and Sialm, Clemens and Sosner, Nathan and Wang, Lixin, The Tax Benefits of Separating Alpha from Beta (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=3178273 or http://dx.doi.org/10.2139/ssrn.3178273

Joseph Liberman

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Clemens Sialm

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Nathan Sosner (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Lixin Wang

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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