The Tax Benefits of Relaxing the Long-Only Constraint: Do They Come from Character or Deferral?

The Journal of Wealth Management, Forthcoming

32 Pages Posted: 25 Oct 2018 Last revised: 6 Dec 2018

See all articles by Nathan Sosner

Nathan Sosner

AQR Capital Management, LLC

Stanley Krasner

AQR Capital Management, LLC

Ted Pyne

AQR Capital Management, LLC

Date Written: December 5, 2018

Abstract

In this study we propose a decomposition of the total tax benefit (or liability) of a strategy into what we define as character and deferral components. Our decomposition is mathematically straightforward and intuitive and allows for a quick and informative assessment of tax benefits of different tax-aware strategies without modeling various investor-specific situations. We use this character-deferral decomposition to identify the source of tax benefits resulting from relaxation of the long-only constraint. Our empirical evidence shows that for tax-aware strategies relaxing the long-only constraint results in a large increase in their tax benefits in particular due to an increase in the character benefit. We conclude that tax-aware relaxed-constraint strategies are more attractive to taxable investors than their long-only counterparts and provide some caveats to this conclusion.

Keywords: Tax-Aware Portfolio Management, Active Management, Quantitative Strategies, Relaxed-Constraint Strategies

JEL Classification: G11, H21, H24

Suggested Citation

Sosner, Nathan and Krasner, Stanley and Pyne, Ted, The Tax Benefits of Relaxing the Long-Only Constraint: Do They Come from Character or Deferral? (December 5, 2018). The Journal of Wealth Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3264213 or http://dx.doi.org/10.2139/ssrn.3264213

Nathan Sosner (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Stanley Krasner

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Ted Pyne

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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