Understanding a Tax-Aware Defensive Equity Long-Short Strategy

Abstract

We describe a Tax-Aware Defensive Equity Long-Short (TADELS) strategy, including its construction and pre-tax and after-tax performance. TADELS closely replicates the pre-tax performance of a similar tax-agnostic strategy and has the potential to achieve a meaningful tax benefit for a taxable investor.

TADELS tax benefit remains even when accounting for liquidation taxes. We show that TADELS is attractive in both up- and down-market periods and can diversify typical hedge fund allocations. Moreover, TADELS tax benefit can make an investor’s entire portfolio more tax-efficient.

Keywords: Defensive Investing, Long-Short Equity Strategies, Quantitative Strategies, Tax-Aware Portfolio Management

JEL Classification: G11, G50, H24