What Taxable Investors Still Get Wrong About Capital Markets

Chang, you're the top performing banker at JP Morgan. You're also at Goldman Sachs PWM before. And you, like me, are a tax alpha nerd.

Why is tax alpha so topical today? As taxable investors, we all eat after-tax returns, right? Like the vast majority of the investment management industry is built around the idea of pre-tax returns.

Everyone builds portfolios around it, right? We look at that. Uh but the reality is when we pay for our kids' school tuition, we go out to eat for families, we pay our mortgages, those are after-tax dollars.

And so, this idea of tax alpha, you know, how do you really restructure your assets, your liabilities, your overall balance sheet to really be thoughtful about after-tax returns? Super interesting space. There's a ton of innovation going on right now.

A lot of people see this as a niche topic or just wealth managers that love to talk about this. For somebody that does have capital gains, and whether they're selling shares or whether they're they have carry that they're bringing in, what are the different options and what are the trade-offs there? You have to be very thoughtful about manager selection.

There's a huge proliferation of products in this whole long-short tax-aware SMA space. And mechanically, I think most of us get it where, you know, you have a core portfolio, you use margin, whether it's Reg T or portfolio margin, you go long and short a basket of stocks. As investors, what we should really care about is how are those long and short baskets constructed?

What is the stock selection? What is the alpha model that's going into picking those stocks? Because it's precisely that stock picking that's going to produce that pre-tax alpha.

And these strategies really only work well when you have abundant pre-tax alpha because there are embedded costs, there's like financing costs, there's fees, et cetera.