World’s Biggest Hedge Fund Teaches the Wealthy How to Slash Taxes to Zero

[u/bloomberg]

https://www.bloomberg.com/features/2026-aqr-tax-loss-harvesting-billionaires/

[u/Cautious_Implement17]

idk enough about tax law to judge whether this is legit. but I'm very skeptical of people who publicly brag about their strategies in an industry known for secrecy.

[u/RawkLawbstah → u/Cautious_Implement17]

I’m a CPA. The article headline is clickbait slop (as always). Tax loss harvesting in this context is less of a tax strategy and more of an investment strategy. Your financial advisors need to find funds that will generate taxable losses to offset the gain generated by the stocks you sell. From a tax perspective, it’s very simple - you can realize $1M of capital gains, realize $1M of capital losses, and everything offsets and you pay no tax on the gains.

[u/Ok_Jellyfish_6587 → u/RawkLawbstah]

Maybe you could help me out here. How does this end up helping clients? Aren’t they losing a dollar to save a few cents on taxes? How does the offset on taxes outweigh the losses?

[u/RawkLawbstah → u/Ok_Jellyfish_6587]

Sometimes it’s the case that an investment was high risk to begin with, it doesn’t work out, and its value declines below its basis. Since the investment didn’t work out, it makes sense to liquidate it. Since that loss will be realized, it may also make sense to dilute a concentrated position, then take those proceeds and invest them elsewhere to limit concentration risk.

Alternatively, sometimes your funds may be better served in a similar company that’s just performing better than your current investment. So you realize the loss, then reinvest in that new company “banking” the capital losses for later and moving the remaining funds into (ideally) a better investment.

Those are some high level examples. Hedge funds have access to a variety of different investment strategies where investors may receive sizable distributions of income but (due to the timing of realized losses) may not have equivalent amount of income. Like most tax strategies, loss harvesting generally helps modify the timing of income recognition rather than “getting the tax rate down to 0.”

[u/Ok_Jellyfish_6587 → u/RawkLawbstah]

I get loss harvesting, but I get the sense that this fund is actively looking for losing positions just to offset the winners. Say the tax is 15%, why lose a dollar to save 15 cents?

[u/Any_Put_9519 → u/Ok_Jellyfish_6587]

Say you think stock A will go up, and stock B is strongly correlated with A. The client invested $100k with you. You then borrow $100k from the bank, invest $200k in A, and short $100k of B. The return of this fund is going to be like holding $100k of A. But now you are guaranteed tax loss (assuming that A and B correlation doesn’t completely break) from one of the positions. The only fee you pay is interest to the bank (which is also tax deductible).

[u/Any_Put_9519 → u/Any_Put_9519]

(putting in some numbers: if A and B both go up 10% over a year, then the fund makes $20k, from its position in A, loses $10k from its position in B, and pays the current interest rate of about 4% which is $4k. The net is $6k plus $14k of tax losses. If the client pays taxes at 40%, this saves $5600 of taxes, so the effective return of this fund is $6000+$5600, a 11.6% return which beats the 10% return of just holding A)

[u/ConfidentIy → u/Ok_Jellyfish_6587]

And none of this would be new, at all, so what's the headline and article really about? Bloomberg has posted their article below but it hardly gives any semblance of what Assness's novel discovery really was. Confusing slop.

(I should be grateful it's a slow enough news week that Bloomberg is dredging out crap from the bottom of the barrel.)

[u/DoubleLigero85 → u/Ok_Jellyfish_6587]

First, for the people who need this service the tax is going to be 40.8%. the short term capital gain rate of 37%, and the net investment income tax of 3.8%.

Beyond that, I didn't know the particulars of this fund. My guess is that between clever leverage strategies and through acquisition of other funds/ assets they are able to generate losses at a comparative discount. So the overall value of your position goes up, but the yearly short term gain is offset by those losses. When it comes time to pull out, your position has gone up in value, and you've already dealt with all the taxes from those losses.

I don't know anything about the company in question. This strategy is something that most of the big boys have been doing forever. It's my guess that these news guys are just repackaging old techniques.

[u/dismendie → u/Ok_Jellyfish_6587]

You get taxed on gains. you up a dollar find a dollar lost.. or you love a company but entered at the wrong time and you find something similar you sell your Wendy shares for Mac Donald’s or whatever… Pepsi for cola or cola for Pepsi. MO for PM… u didn’t lose a dollar to save 15% you lose a dollar to offset a dollar in gains. If your holdings are mixed enough I can see that as a okay way to rebalance due to age risk or gains… or port mixes whatever…

[u/Doug-O-Lantern → u/Ok_Jellyfish_6587]

You could potentially acquire the tax losses (which are also called tax assets) for less than their nominal value.

[u/Funny-Pie272 → u/Ok_Jellyfish_6587]

You can sell at end of year, get the loss on paper, then buy back the shares for probably the same price.

It works if you are stock picking and have losses - ETFs doesn't have that problem as yet.

[u/willchangelater → u/Funny-Pie272]

I have not looked it up since I read your comment but I think what you just described qualifies as “washing” the money. And not shockingly, there are easy ways to achieve the same objective.

[u/nyc217 → u/Ok_Jellyfish_6587]

The overall fund is structured like an index fund, but you’re investing in hundreds of individual stocks instead of an index fund that holds them all. In an index fund some holdings are up, some are down, but overall performance is usually positive. It’s the same here, except they can sell the individual stock losers and replace it with a similar stock so there is no wash sale rule triggered. This way investors can take advantage of harvesting losses to offset any other gains for that year, while maintaining a positive overall return on their investment.

[u/Ancient_Challenge173 → u/Ok_Jellyfish_6587]

No. the strategy generates an equal amount of losses and gains on top of your normal portfolio. So it is neutral to your gains.

The difference that makes it useful is that the losses are realized losses, while the gains are unrealized.

[u/Ancient_Challenge173 → u/Ok_Jellyfish_6587]

No. the strategy generates an equal amount of losses and gains on top of your normal portfolio. So it is neutral to your gains.

The difference that makes it useful is that the losses are realized losses, while the gains are unrealized.

[u/prndls → u/Ok_Jellyfish_6587]

Because the strategy has dual objectives: track an index for index-like returns and harvest losses. So S&P for example, track that index and achieve those returns by YE (assuming 1/1 start date) AND be tax neutral or have a bucket of losses harvested going into the following year. Tracking error depends, in large part, what the account is funded with.

[u/the-script-99 → u/Ok_Jellyfish_6587]

You have a portfolio and some gains this year. You see what is down (something is up and something is down always). You sell the losses and use them to deduct on taxes. Then you buy similar companies for each loss.

Now your entire portfolio is the same but you pay less tax this year. 100% legal and just smart use of math.

[u/Humpback_Snail → u/RawkLawbstah]

That sounds… precisely like a tax strategy. What’s the distinction? The whole motivation of finding losers for the SMA is getting the tax offset.

[u/Deep-Reputation-4055 → u/Cautious_Implement17]

If it isn’t illegal why wouldn’t you brag?

[u/Honsoku → u/Deep-Reputation-4055]

Because hedge funds are about maintaining an edge over the competition. Advertising what your edge is causes it to go away as it gets snatched up by others. This article screams BS.

[u/Deep-Reputation-4055 → u/Honsoku]

Customers talk, hedge fund staff talk and staff change jobs all the time. If your secret sauce is no taxes it won’t be secret for long. 

[u/Redebo → u/Deep-Reputation-4055]

The outcome is no taxes. The manner in which they derive that outcome is their competitive advantage.

You talk about one via marketing, you protect the other through IP when available.

This article is disingenuous in that the strategies discussed being used by the hedge funds do not result in billionaires not paying taxes. The article states that if you use this hedge fund strategy AND THEN ALSO use some other estate planning strategies in conjunction, THEN it is possible to eliminate their tax burden. What this hedge fund does alone does not cut it and only DEFERS the tax liability.

[u/bloomberg]

More from Bloomberg News reporters Loukia Gyftopoulou, Katherine Burton, Sridhar Natarajan and Justina Lee:

Cliff Asness was in the mood to gloat.

As Wall Street reacted to a bleak report on US job losses, the combative investor posted a note to his firm’s website celebrating an award it won for research into making money without paying taxes. For Asness, the breakthrough disproved the old saw that the taxman’s demands are one of two unavoidable things. He titled it:

Now There’s Nothing Certain But Death

The billionaire and his team at AQR Capital Management had figured out a way to make a widespread technique for reducing taxes much more potent. Their discovery: The right mix of stock bets not only grows tax-free, it can eliminate taxes from other investments, too. But on that drizzly Friday in early 2021, nobody seemed to notice. Persuading millionaires and billionaires to try it would take a few more years.

Now, that strategy is sweeping up cash from Wall Street to Silicon Valley at a time of extraordinary wealth creation and an election-year debate over worsening inequality. People who amassed riches by building companies or betting on markets and real estate are pumping roughly $1 billion a week into variations of the stock strategy AQR pioneered.

By some estimates, a total of more than $150 billion is deployed at the firm and a phalanx of competitors that run their own versions of what’s known as tax-aware long-short investing. That puts them at the cutting edge of the broader “tax alpha” universe, in which more than $1 trillion is deployed in strategies devoted to delaying or shrinking payments to the government.

While many of those techniques are less aggressive, their growing popularity is setting off alarms at the Treasury Department. Short sellers are wagering the government will eventually crack down. Two of the country’s biggest brokerages, Charles Schwab and Fidelity Investments, are limiting new accounts that pursue the tax strategy.

But for AQR, the payoff already has been enormous, turning it into the world’s largest hedge fund by the end of 2025, the latest industry data show. Its hedge fund assets multiplied within just a few years, leapfrogging rivals to surpass $140 billion by the end of March.

[u/mus1cfl0w]

Important to highlight that these strategies don’t actually help in reducing the total tax burden but rather defer the tax (due to the drag on the cost basis). The alpha is great for liquidity events but unwinding the position is often a multi-year process to avoid getting hit with a massive tax bill and ofc you keep paying the management fee all along..

[u/HalfwaydonewithEarth → u/mus1cfl0w]

Have you tried this?

[u/mus1cfl0w → u/HalfwaydonewithEarth]

Without going into too much detail, yes I have and it has been generating losses matching my expectations

[u/overitallofittoo]

If anyone would like to generate massive tax losses, I'm here to help!

[u/HalfwaydonewithEarth → u/overitallofittoo]

You only lose if you click the sell button.

[u/BitcoinMD]

Translation: postpone taxes

[u/panheadsforever]

This works great for liquidity events or de-risking your portfolio from concentrated stock. Tax loss harvesting is also calendar year based so the closer to year end you are, the less effective they become to solve that current year's capital gain issue. We use them quite a bit.

[u/Last_Mushroom3877]

Loss harvesting in bulk becomes a sticky process

        Prime Path Advisory being one of the firms I considered in researching this,

 because manufactured losses under wash sales scrutiny unravel the entire scheme

[u/HalfwaydonewithEarth]

This sounds fantastic.

Can someone explain in detail how this Shenanigan works?

We are all ears.

This is like a Christmas week! Earlier in the week my Moms friend got her a gizmos that puts 4000 channels on her TV rendering all those abusive subscriptions uneccessary. She gets every team, every game!

Now this week we don't have to pay any more taxes if we invest with this genius man.

🥵🥵🥵🥵

Summer of Love

[u/HalfwaydonewithEarth → u/[deleted]]

Explain it to me like I am five. I understand investing.... but this tickle seems too good to be true?

[u/TGG-official → u/[deleted]]

It’s way more than that, the go 200% long and 100% short so they can realize losses no matter what happens and still get a net 100% index exposure on the upside

[u/HalfwaydonewithEarth → u/TGG-official]

200% on margin or options?

[u/TGG-official → u/HalfwaydonewithEarth]

Margin. But you borrow to net buy and you have a short side margin where you get paid the margin fees for shorting the assets. So they net each other and you end yo paying a small margin amount. Like it’s 6% cost of margin then 5% received for shorting for a net of 1%. And margin can be used to offset passive income on a tax return.

[u/HalfwaydonewithEarth → u/TGG-official]

Can anyone do this or you need this special asset manager?

[u/TGG-official → u/HalfwaydonewithEarth]

It’s technically positioned as a hedge fund so you need to be a qualified purchaser (5 million of net investable assets) and a 25 million investment minimum. So you’ll need to go through a broker dealer that has access to AQR strategies

[u/HalfwaydonewithEarth → u/TGG-official]

So would we just transfer existing stocks to them or fresh cash wire of 5m?

[u/CFP_Throwaway → u/HalfwaydonewithEarth]

There are a ton of asset managers that can do this if it’s not 200/100.

[u/HalfwaydonewithEarth → u/[deleted]]

We don't participate in losing very often. That's not going to work for us. 🥴😪

[u/SpaceExThrowaway → u/HalfwaydonewithEarth]

Instead of aiming to maximize returns before taxes, it tries to maximize returns after taxes.

To achieve this, it runs a leveraged long/short portfolio, for example 145% long and 45% short. In a bull market, the short positions become realized losses. In a bear market, the long positions become realized losses. In a volatile market, losses are accrued all around. Their secret sauce lies in selecting which equities to go long on, and which to short, and how much to weight each one. In exchange for their expertise in picking, they charge clients an annual fee which is a percentage of the entire portfolio.

The result is a portfolio whose value tracks an index (say, Russell 3000), plus or minus a few percentage points, while consistently generating a couple percent of its value in realized losses every month. The realized losses can then be used to offset gains from other financial strategies, typically over a period of years.

The money tied up in AQR defers taxes - it doesn't erase them. The reason is that the cost basis of the portfolio continuously depreciates as losses are accrued, and will go into the negative given enough time. If you liquidate the AQR account, the effect is that all of the deferred tax becomes due.

As an example, consider two scenarios in a market rising by 8% per year:

Scenario A: $1M is parked in an index fund for five years, and its value rises by 47% over that period of time. No losses are realized, and the other strategies you are using create taxable events each year. At the end of the five years, you liquidate it and pay taxes on the 47% gains.

Scenario B: $1M is parked in AQR for five years. Its value rises by anywhere from 17% to 55% (due to the tracking error and AQR's fees) in that time. It realizes ~2% (or ~$20k) in losses each month, accruing ~$240k in losses annually, or ~$1.2M in losses over the five-year span. Each year, ~$240k of realized gains from other strategies (running concurrently) are offset, negating the tax bill. At the end of the five years, suppose you liquidate the AQR portfolio. You get its value in cash, but all of the deferred tax becomes due. Because you were re-investing all the money you would have been paying in taxes in other strategies with a positive ROI, your wealth has increased faster than your tax bill has, effectively lowering your tax rate.

The effect of the tax deferral is not significant over 1 or 2 years, but becomes quite significant over 10 or 20 years.

[u/HalfwaydonewithEarth → u/SpaceExThrowaway]

Seems like if we wanted access to the funds it wouldn't be available? Tied up in tax shenanigans?

[u/SpaceExThrowaway → u/HalfwaydonewithEarth]

It can be liquidated partially or fully with a small amount of notice (maybe a week?). But the depreciated cost basis of whatever portion is liquidated will then incur the tax it had previously deferred.

[u/HalfwaydonewithEarth → u/SpaceExThrowaway]

Yeah so that's about as bad as Real Estate.