Having Your Cake and Eating It Too : The Before and After Tax Efficiencies
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چکیده
Recent studies have shown that adding a short extension to a long-only tax exempt equity portfolio leads to a more efficient portfolio. In this work, we show that these extended mandates are even more effective for investors subject to taxes. Not only is the portfolio more efficiently positioned from a pretax perspective, but it offers significant after-tax benefits from increased loss harvesting opportunities and the presence of tax arbitrage between tax rates on long and short positions. We present both conceptual arguments and simulations to validate our thesis. Because these tax effects are known in advance, they can be captured with certainty to provide substantial after-tax value added.
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