The Tax Benefits of Separating Alpha from Beta

50 Pages Posted: 25 May 2018 Last revised: 13 Nov 2018

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: November 12, 2018

Abstract

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

Liberman, Joseph and Sialm, Clemens and Sosner, Nathan and Wang, Lixin, The Tax Benefits of Separating Alpha from Beta (November 12, 2018). 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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