I think they usually say that they are focused on alpha while minimizing beta, i.e. don't compare us to the S&P or other indices because we are market neutral. And in my experience, the large, old firms that I am personally familiar with do in fact have beta very close to 0 in their main funds, so on that front at least some firms do deliver.
This doesn't necessarily make the product a good idea even for people who can get an allocation, however. For example, because most (all?) market-neutral firms engage in active trading, a US UHNW person living in a high-tax state will generally have to pay around 50% of each year's gains in taxes. These taxes will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year, so a gain of let's say 12% becomes 6%, which may have to come out from some other source.
> have to pay around 50% of each year's gains in taxes.
> ...will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year
That's crazy.
I would've thought the hedge fund would be able to hide the capital gains tax (as they're a trader, and should be exempted from capital gains taxes), so you as an investor only pays capital gains tax when you withdraw.
This also implies that the investor doesn't get to carry forward capital losses, or use it to offset their own outside capital gains.
Anecdotally (can't say how I know), many firms did very well in the 2020-2021 Covid crash, also its quite cheap to say buy 50 million in far OTM puts to guard against black swan events. It's far more likely that a slow slide in SPY will show some Beta correlation than anything else.
ddmitriev|1 year ago
This doesn't necessarily make the product a good idea even for people who can get an allocation, however. For example, because most (all?) market-neutral firms engage in active trading, a US UHNW person living in a high-tax state will generally have to pay around 50% of each year's gains in taxes. These taxes will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year, so a gain of let's say 12% becomes 6%, which may have to come out from some other source.
chii|1 year ago
> ...will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year
That's crazy.
I would've thought the hedge fund would be able to hide the capital gains tax (as they're a trader, and should be exempted from capital gains taxes), so you as an investor only pays capital gains tax when you withdraw.
This also implies that the investor doesn't get to carry forward capital losses, or use it to offset their own outside capital gains.
casercaramel144|1 year ago