Portable Alpha for the (Taxable) Masses: Can Capital Efficient Funds Live Up to the Hype?

Abstract

Capital efficient retail products offer the promise of institutional-style portable alpha in an exchange traded fund (ETF) or mutual fund wrapper. Previous studies indicate that one specific type of capital efficient product, a 90/60 equity/bond strategy, has two potential efficiency-enhancing uses within investment portfolios. First, some studies have shown that 90/60 strategies can be used as an efficient replacement for long-only equity positions. Second, other studies suggest that 90/60 strategies can be used as replacements for traditional stock and bond allocations to implement a portable alpha strategy. We investigate both of these claims, net of taxes and fees, for investors that would otherwise invest in a low fee, tax sensitive portfolio of globally diversified equities and high-quality US bonds. We find 90/60 strategies have a role to play as both equity replacement and for implementing portable alpha for taxable investors.