Lot Layering: The New Frontier for Hedge Fund Partnership Allocations

The Journal of Wealth Management, Summer 2020, 23 (1) 22-31; DOI: https://doi.org/10.3905/jwm.2019.1.097

21 Pages Posted: 21 Oct 2019 Last revised: 9 Feb 2021

See all articles by Nathan Sosner

Nathan Sosner

AQR Capital Management, LLC

Philip Balzafiore

AQR Capital Management, LLC

Date Written: January 30, 2020

Abstract

Lot layering may help hedge funds improve the alignment between tax outcomes and the economic experience of their investors. Although lot layering is considered by most tax experts to be the most precise method of partnership allocations, this commonly understood precision is reduced upon redemptions due to the cumbersome and uneconomic basis adjustment method stipulated by Treasury regulations. We propose that changes be made to the current regulations that could remedy this problem. Despite its unavoidable deficiency caused by the basis adjustment requirements under the current regulations, we believe that lot layering aligns tax and economics more closely than do any of the “aggregation” methods presently used by most hedge funds.

Keywords: Lot Layering, Partnership Allocations, Taxation of Partnerships, Securities Partnerships, Hedge Funds

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

Suggested Citation

Sosner, Nathan and Balzafiore, Philip, Lot Layering: The New Frontier for Hedge Fund Partnership Allocations (January 30, 2020). The Journal of Wealth Management, Summer 2020, 23 (1) 22-31; DOI: https://doi.org/10.3905/jwm.2019.1.097, Available at SSRN: https://ssrn.com/abstract=3467674 or http://dx.doi.org/10.2139/ssrn.3467674

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

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