Notes
1 The best extended discussion of the tax issues associated with managing family investment portfolios can be found in Jean L.P. Brunel, Integrated Wealth Management: The New Direction for Portfolio Managers (London: Institutional Investor Books, 2002), especially chapters 6 and 14–17.
2 In reality, other considerations militate against higher hedge exposure for tax-exempt institutions. The main constraint is the huge asset base managed by many institutions and the fact that hedge strategies are almost always capacity-constrained. Hence, it is quite difficult for a large institutional investor to obtain a significant exposure to hedge funds without seriously compromising the quality of the funds selected.
3 The classic journal article on this subject is Robert H. Jeffrey and Robert D. Arnott, “Is Your Alpha Big Enough to Cover Its Taxes?” The Journal of Portfolio Management (1992).
4 The manager could protect his position in any number of ways. For example, he could buy a security whose price behavior is closely correlated with the sold security. He could buy an ETF in the same industry. He could wait 31 days (to avoid the wash sale rule) and buy the security back.
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