Using tax-loss harvesting to eliminate taxes from hedge funds

Advisor used Aperio’s Active Tax Indexing strategy in combination with other asset classes. Aperio demonstrated that the Active Tax Indexing strategy completely eliminated the taxes due from the client’s hedge fund exposure.

Challenge

Advisor set up an allocation that included both Aperio’s Active Tax Indexing strategy and hedge funds. After the first year, the client wanted to quantify the tax impact. Advisor set up a portfolio containing $8.0MM in hedge funds and $5.3MM in Aperio’s Active Tax Indexing strategy.

Aperio solution

Aperio reviewed the recognized tax-losses for the year and with the advisor, compared them to the gains from the hedge funds. The Aperio portfolio recognized $225,000 in short-term tax-losses and $58,000 in long-term tax-losses for the year. The hedge funds resulted in $198,000 in short-term gains and $22,000 in long-term gains.


Impact

The client ended up paying no taxes on his entire hedge fund allocation. If the advisor had used an ETF instead of Aperio, the client would have achieved the same pre-tax return but would have paid another $100,000 in incremental taxes that year.*

 

* These taxes are effectively postponed until portfolio liquidation, or avoided entirely in case of a portfolio transfer into the estate.