Wealthy investors in the US put more than $170 billion into tax strategies — CNBC
In the United States, wealthy investors are actively putting money into tax-aware long-short, or TALS, strategies. Total assets in such strategies grew from $2 billion in 2022 to more than $170 billion, CNBC Top News reports, citing Tax Alpha Insider. These products are designed to track stock indexes while also generating tax losses that can be used to offset capital gains taxes.
Demand for TALS has strengthened after three years of double-digit stock market growth. Such products are of interest, in particular, to business owners after selling companies, executives with concentrated stock holdings, and company employees who own shares that have risen substantially in value after an IPO. For the wealth management industry, complex long-short strategies have become a source of high fees and a way to attract clients.
Attention from the US Treasury Department
In the summer, representatives of the US Treasury Department warned at a Wall Street Tax Association seminar against “aggressive planning” involving investment products that generate tax losses. They did not directly name TALS, but mentioned similar “tax-alpha” products, including 351 conversions, ETFs with box spread strategies, and other loss-generating funds.
Officials did not state that such practices are illegal and are currently gathering information and views from Wall Street representatives and tax lawyers. According to lawyers, the Treasury Department may issue new guidance, prohibit the products, or leave the rules unchanged. Potential investors are advised to assess possible consequences more cautiously.
More current news is available on the UA.News Telegram channel Telegram.
A difficult exit and costs
Experts note that TALS defer tax payments rather than eliminate them. When exiting the strategy, an investor needs to reduce leverage, which can cause accumulated unrealized gains to be realized all at once and result in a substantial tax payment.
Such portfolios may include thousands of stock trades, frequent trading, short positions, and borrowed financing. The common 130/30 model involves $100 of invested funds, $30 borrowed for additional long positions, and $30 in short positions; some funds offer even higher levels of leverage. This can increase the deviation of portfolio returns from the index.
Total TALS costs, including management fees and financing and borrowing expenses, range from 1% to 3% of the portfolio. Analysts advise investors to compare these annual costs with the potential tax benefit. According to CNBC, financing spreads widened over the past year for many clients of such strategies, as lenders demanded greater compensation for risk.
