Not Locked Up: Accessing Liquidity in Tax-Aware Portfolios

Tax-aware long-short portfolios can provide substantial liquidity through partial, adaptive withdrawals without necessarily sacrificing their pre-tax investment characteristics.

• A $10 million investment in a 150/50 strategy supported average cumulative withdrawals of about $10.2 million by the end of year 10, with withdrawals beginning after year two.
• Under the same assumptions, average cumulative withdrawals reached approximately $12.4 million for a 200/100 strategy and $13.9 million for a 250/150 strategy.
• AQR modeled portfolios built from the Russell 1000, benchmarked to the Russell 1000 with a beta of 1.0, monthly rebalancing, and target tracking errors of 2%, 4%, and 6% for the three strategies.
• A one-time withdrawal from a 150/50 strategy averaged as much as 43% of initial capital after two years, while higher-leverage strategies generally supported larger withdrawals.
• Withdrawal capacity depends on the strategy’s age, market conditions, leverage, and the amount of capital-gain realization required; adaptive withdrawals can take more when capacity is high and less when it is low.

Takeaway: Tax-aware long-short capital is not necessarily locked up, but withdrawals can reduce cumulative after-tax wealth when the strategy’s after-tax return exceeds the return available on the withdrawn money elsewhere.