The Long and Short of Tax Efficiency

Abstract

For many private investors, tax efficiency is often addressed by employing investment managers with low portfolio turnover or by incorporating a “tax efficient core” as part of a more diversified portfolio. In this paper, the author suggests that there are situations where the pursuit of tax efficiency can and should take place outside of an investor's core portfolio. His proposed solution, ironically, relies on hedge funds, which are notoriously known as tax inefficient investment strategies. He maintains that certain types of hedge funds—when managed appropriately—can be excellent vehicles for increasing the tax efficiency of a portfolio.