Generating tax losses -- Gotham Triple Advantage S&P 500 Strategy LP - Series C

[benchmark]

Has anyone done tax loss harvesting? I was pitched with the Gotham fund, they claim to generate about 25% tax loss, while tracking S&P500. They charge a hefty fee at 1.85% of course. 

 

is this worthwhile? 

[Dinar]

31 minutes ago, benchmark said:

Has anyone done tax loss harvesting? I was pitched with the Gotham fund, they claim to generate about 25% tax loss, while tracking S&P500. They charge a hefty fee at 1.85% of course. 

 

is this worthwhile? 

I do tax harvesting with my own portfolio on a regular basis (at least once a month.)  I am not sure how 25% tax loss can be arrived at.  Historically, probably 50-100 basis points per annum for my portfolio if I had to guess. 

[benchmark]

As far as I understand it, they create a tracking position on S&P, then add long and short positions on the S&P 500 stocks, and loss-harvest everyday(?) to create the artificial loss. 

 

I'm curious a) about these guys reputation; b) if there are other firms offering similar funds.

 

[Dinar]

1 hour ago, benchmark said:

As far as I understand it, they create a tracking position on S&P, then add long and short positions on the S&P 500 stocks, and loss-harvest everyday(?) to create the artificial loss. 

 

I'm curious a) about these guys reputation; b) if there are other firms offering similar funds.

 

I know Schwab, Fidelity and GS offer this, probably others. 1.85% fee is insane, and will negate the entire tax advantage.  

[lnofeisone]

I don't have a point of view on Gotham, but I have worked on this issue for the IRS. At best, this tax deferral strategy can give you access to funds now. You'll pay the tax once you unwind the entire portfolio. So it may make sense in some cases (say you are on the verge of retiring and will shift to lower tax bracket in few years but need funds now).

 

1.85% is a relatively reasonable fee. PGIM charges 3%. Personally, I wouldn't pay for this because you can do it yourself.

[Dinar]

1 hour ago, lnofeisone said:

I don't have a point of view on Gotham, but I have worked on this issue for the IRS. At best, this tax deferral strategy can give you access to funds now. You'll pay the tax once you unwind the entire portfolio. So it may make sense in some cases (say you are on the verge of retiring and will shift to lower tax bracket in few years but need funds now).

 

1.85% is a relatively reasonable fee. PGIM charges 3%. Personally, I wouldn't pay for this because you can do it yourself.

it is not a reasonable fee.  The entire tax savings are effectively consumed by the fee.  

[Jay Rent]

A better term for this is 'Direct Indexing' .    Some wealth managers like Josh Brown - CNBC switched their clients to direct investing closer to market bottoms in 2021, 2022.  It's harder if you already have a significant amount of unrealized capital gains.     It can be popular for those in high tax brackets.

 

Fidelity direct indexing fees seem to be close to 35 basis points and your index portfolio returns might improve  by 1% (ignoring any capital gains from liquidating your funds)

 

Can't speak for Gotham and achieving 25% tax harvesting but it might be possible as a one off (switching after a significant decline in the overall market.)

 

 

[lnofeisone]

2 hours ago, Dinar said:

it is not a reasonable fee.  The entire tax savings are effectively consumed by the fee.  

It's reasonable for this space. You can generate savings well in excess of the fee but a lot of assumptions have to align. Like I said, I wouldn't pay for someone to do it. Most investors who know how to short equities and know how to select tax lots with their brokers can do this strategy themselves.

[Dinar]

1 hour ago, lnofeisone said:

It's reasonable for this space. You can generate savings well in excess of the fee but a lot of assumptions have to align. Like I said, I wouldn't pay for someone to do it. Most investors who know how to short equities and know how to select tax lots with their brokers can do this strategy themselves.

Would you mind showing how the math works then, since I cannot get it to work.  Thank you.

[lnofeisone]

4 hours ago, Dinar said:

Would you mind showing how the math works then, since I cannot get it to work.  Thank you.

Say you have $100 ST gain on a $100 investment (total $200) AND you make over $518,900. Would you rather pay your ST rate of 37% ($37) or

 

$6 (3% fee) +  0 (cap gain if your income next year falls to 0) --> say you have y to y volatile income

$6 (3% fee) + 15% (LT cap gain rate)--> say you are single with income under $518,900

$6 (3% fee) + 20% (LT cap gain rate)--> say you are single and over $518,900

 

Again, this is packed with assumptions, but there are people for whom this makes sense. 

 

 

 

[winjitsu]

On 1/21/2025 at 1:25 AM, benchmark said:

Has anyone done tax loss harvesting? I was pitched with the Gotham fund, they claim to generate about 25% tax loss, while tracking S&P500. They charge a hefty fee at 1.85% of course. 

 

is this worthwhile? 

Gotham is Joel Greenblatt's fund, of You Can Be A Stock Market Genius fame. So the firm and principal are legit. But I vaguely followed their magic formula fund for a few years and I know it under-performed the S&P. Greenblatt has been on a few podcasts over the years talking about the quants they employee and the strategies they look at. A lot of historical back testing from what I recall.

[benchmark]

On 1/21/2025 at 3:02 PM, lnofeisone said:

Say you have $100 ST gain on a $100 investment (total $200) AND you make over $518,900. Would you rather pay your ST rate of 37% ($37) or

 

$6 (3% fee) +  0 (cap gain if your income next year falls to 0) --> say you have y to y volatile income

$6 (3% fee) + 15% (LT cap gain rate)--> say you are single with income under $518,900

$6 (3% fee) + 20% (LT cap gain rate)--> say you are single and over $518,900

 

Again, this is packed with assumptions, but there are people for whom this makes sense. 

 

 

 

I don't think or know any firm can defer the tax at 100%. The most I've heard from Gatham is about 25-30% a year. So in this case, you'll still have $75 of ST gain, so the math is about $6 + $75*0.37 = $33.75. So you still save some tax, but not as much. In addition, their tracking S&P500, given where the market is at, it might end up losing money this year. 

[lnofeisone]

17 hours ago, benchmark said:

I don't think or know any firm can defer the tax at 100%. The most I've heard from Gatham is about 25-30% a year. So in this case, you'll still have $75 of ST gain, so the math is about $6 + $75*0.37 = $33.75. So you still save some tax, but not as much. In addition, their tracking S&P500, given where the market is at, it might end up losing money this year. 

Sure. No argument there. Usually, when these strategies are employed, it's part of a broader tax strategy with the idea of maximizing: permanent reduction of current tax liability, tax arbitrage, and tax deferral. Doing just one of these is generally suboptimal. 

[benchmark]

11 hours ago, lnofeisone said:

Sure. No argument there. Usually, when these strategies are employed, it's part of a broader tax strategy with the idea of maximizing: permanent reduction of current tax liability, tax arbitrage, and tax deferral. Doing just one of these is generally suboptimal. 

what's tax arbitrage? 

 

[lnofeisone]

On 1/24/2025 at 9:20 PM, benchmark said:

what's tax arbitrage? 

 

There is a lot here and it depends on if one is a corporation or a person. For a corporation, recognize revenue in low-tax jurisdictions and recognize expenses in high-tax jurisdictions. For individuals, there are states that don't tax capital gains (FL, TN, and a few others). This one is often utilized when people move for jobs (or you can be more inventive if you so choose). You can sell in your current state or in your future state and you can pick based on the capital gains tax. 

 

There is also a variety of trading schemes that can be tuned similarly. For example, buying a stock that will go before ex-div and holding it for 60 days with a corresponding short. Day after ex-div, the stock will trade down by the dividend amount, and you can sell it, getting an ST loss to offset your LT gains, and the dividend will be qualified.  

[benchmark]

On 1/27/2025 at 7:13 AM, lnofeisone said:

There is a lot here and it depends on if one is a corporation or a person. For a corporation, recognize revenue in low-tax jurisdictions and recognize expenses in high-tax jurisdictions. For individuals, there are states that don't tax capital gains (FL, TN, and a few others). This one is often utilized when people move for jobs (or you can be more inventive if you so choose). You can sell in your current state or in your future state and you can pick based on the capital gains tax. 

 

There is also a variety of trading schemes that can be tuned similarly. For example, buying a stock that will go before ex-div and holding it for 60 days with a corresponding short. Day after ex-div, the stock will trade down by the dividend amount, and you can sell it, getting an ST loss to offset your LT gains, and the dividend will be qualified.  

Thanks, this makes sense.

[TwoCitiesCapital]

On 1/21/2025 at 8:41 AM, Dinar said:

it is not a reasonable fee.  The entire tax savings are effectively consumed by the fee.  

 

Most people invested in these strategies are paying the fee to delegate - not for the tax savings. When you look at the fees for other delegated options that DONT offer the tax efficiency - the fees for tax efficiency start to make sense. 

 

On 1/23/2025 at 3:19 PM, benchmark said:

I don't think or know any firm can defer the tax at 100%. The most I've heard from Gatham is about 25-30% a year. So in this case, you'll still have $75 of ST gain, so the math is about $6 + $75*0.37 = $33.75. So you still save some tax, but not as much. In addition, their tracking S&P500, given where the market is at, it might end up losing money this year. 

 

Depends on timing. I work on similar strategies for my firm. Clients that started with us in 2020 had net realized losses that year that carried forward to offset/eliminate 2021 gains and then you got to re-up the loss bank in 2022 to offset/eliminate 2023. I'm sure we have some clients who have paid zero-capital gains for the last 4 years despite good performance, resetting basis on a portion of the portfolio, and rebalancing between stocks/bonds...but it's not the same story for people who started with us in 2021 or 2019. Timing is a lot do the tax game. 

 

 A lot of it will come out in the wash at the end but 

1) there is an enduring benefit of deferral and compounding that deferral and 

2) for those that intend to pass it along as part of their estate - deferring to step-up is a value unto itself

 

None of this is worth the 1.5% itself IMO - but, again, that's not what the fee is charged for. It's charged for the convenience of delegation and is similar to non-tax managed delegated programs in terms of price.

Edited January 31 by TwoCitiesCapital