Protecting Appreciation in Taxable Investment Securities and Portfolios with Hedging Strategies

Abstract

Many individuals and trusts have highly appreciated securities in their taxable portfolios due to the strong rise in stock valuations over the last 20 years. These stocks may be a large percentage of the overall portfolio (concentrated positions) or low percentage holdings worth large amounts. For investment advisors and trustees that have full, discretionary management power over taxable portfolios, the exact nature of the duty to protect appreciated securities and portfolios is unclear, but bound to be a growing point of interest, contention, and litigation, leading to a growing school of thought that investment advisors and trustees may now have a duty to understand the use of applicable hedging techniques. This article explains the primary hedging strategies, which are the most straightforward and conservative, and provides situational uses within the context of the professional duties of the investment advisor and trustee. As part of the analysis, a review of the tax aspects of hedging strategies is very important because tax savings are one of the primary benefits of hedging strategies.