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The Journal of Wealth Management

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

Nathan Sosner, Stanley Krasner and Ted Pyne
The Journal of Wealth Management Spring 2019, 21 (4) 10-31; DOI: https://doi.org/10.3905/jwm.2019.1.068
Nathan Sosner
is a managing director with AQR Capital Management in Greenwich, CT
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Stanley Krasner
is an associate with AQR Capital Management in Greenwich, CT
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Ted Pyne
is a managing director with AQR Capital Management in Greenwich, CT
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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 it 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 drastic increase in their tax benefits, in particular owing 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.

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The Journal of Wealth Management: 21 (4)
The Journal of Wealth Management
Vol. 21, Issue 4
Spring 2019
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The Tax Benefits of Relaxing the Long-Only Constraint: Do They Come from Character or Deferral?
Nathan Sosner, Stanley Krasner, Ted Pyne
The Journal of Wealth Management Jan 2019, 21 (4) 10-31; DOI: 10.3905/jwm.2019.1.068

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The Tax Benefits of Relaxing the Long-Only Constraint: Do They Come from Character or Deferral?
Nathan Sosner, Stanley Krasner, Ted Pyne
The Journal of Wealth Management Jan 2019, 21 (4) 10-31; DOI: 10.3905/jwm.2019.1.068
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  • Article
    • Abstract
    • A BRIEF OVERVIEW OF TAX-AWARE STRATEGIES
    • TAX EFFICIENCY OF A TAX-AWARE RELAXED-CONSTRAINT STRATEGY THROUGH THE LENS OF A CHARACTER-DEFERRAL DECOMPOSITION
    • PRACTICAL SOLUTIONS FACILITATED BY CHARACTER-DEFERRAL DECOMPOSITION
    • FURTHER CONSIDERATIONS RELATED TO RELAXED-CONSTRAINT STRATEGIES
    • ACKNOWLEDGMENTS
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • APPENDIX D
    • ENDNOTES
    • REFERENCES
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