AQR Capital Management examines whether pre tax alpha strengthens or weakens the tax benefits of tax aware long short equity strategies. The paper argues higher alpha can actually increase tax benefits over time, with leverage amplifying the effect. A notable finding is that a 250/150 strategy’s cumulative net capital losses reached 830% at a 1.0 information ratio over 15 years.
The Tax Benefits of Pre-Tax Alpha
AQR
Joseph Liberman, Nathan Sosner
Research
97 Pages
Key Takeaways
Alpha Enhances Tax Benefits: For a 250/150 strategy, 15 year cumulative net capital losses rose from 272% at a -1.0 IR to 830% at a 1.0 IR.
Leverage Magnifies Results: The gap in cumulative net capital losses between -1.0 and 1.0 IR was 21% for 150/50, 191% for 200/100, and 558% for 250/150.
Transition Costs Decline: For a 250/150 strategy after 15 years, transition tax impact improved from -44% at -1.0 IR to -35% at 1.0 IR.
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