A Proposal for Tax-Efficient Active Equity Investing - JWM
Active Long Portfolio = Index Portfolio + Market Neutral Portfolio
By KEVIN MEANS
The typical active equity investor hopes to garner return from two sources: market exposure and manager alpha. In a traditional long-only portfolio, the two are inextricably tied together. Capturing alpha usually involves turnover, sometimes a lot of turnover, depending upon the strategy. For a taxable investor, incurring turnover means paying taxes. Capturing the market risk premium, on the other hand, requires almost no turnover.