{'fraction_non_alphanumeric': 0.02066115702479339, 'fraction_numerical': 0.005509641873278237, 'mean_word_length': 5.002754820936639, 'pattern_counts': {'":': 0, '<': 0, '<?xml version=': 0, '>': 0, 'https://': 0, 'lorem ipsum': 0, 'www.': 0, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
The Tax Benefits of Separating Alpha from Beta

Long-only active investment strategies have an inherent flaw: Investors pay capital gains taxes on market-related gains as well as on the alpha created. By separating alpha and beta, taxes can be reduced and returns enhanced. Using both simulated and historical data, we show that separating active returns (i.e., alpha) from market exposure (i.e., beta) may have significant tax benefits. We find that an investment strategy that invests separately in a passive index portfolio and an actively managed long–short portfolio is more tax efficient than a long-only actively managed strategy with similar risk and style exposures. The turnover of a traditional active strategy causes capital gain realizations in both the active and passive portfolio components. In contrast, the turnover of a strategy that separates alpha from beta is concentrated in the long–short component and enables the deferral of capital gain realizations in the passive market component. Separating alpha from beta is different from systematic tax management as described in the literature. Our approach provides a practical solution for taxable investors in a world dominated by tax-agnostic managers. Disclosure: AQR Capital Management is a global investment management firm that may or may not apply investment techniques or methods of analysis similar to those described herein. The views expressed here are those of the authors and not necessarily those of AQR. The reader should conduct his or her own analysis and consult with professional advisers prior to making any investment decisions. AQR is not a tax adviser. This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax adviser. Editor’s Notes Submitted 22 March 2019 Accepted 11 September 2019 by Stephen J. Brown This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Benjamin Schneider, CFA, was one of the reviewers for this article.