Volume 20, No. 3, Third Quarter 2022

Practitioner’s Digest • Vol. 20, No. 3

The “Practitioners Digest” emphasizes the practical significance of manuscripts featured in the “Insights” and “Articles” sections of the journal. Readers who are interested in extracting the practical value of an article, or who are simply looking for a summary, may look to this section.

Interview with Dean Lebaron and Charley Ellis

As part of our twentieth anniversary of the JOIM, I have asked a few luminaries to share their sage thoughts in our “Insights” section. The following contribution is from Dean LeBaron who also enlisted comments from Charley Ellis in an interview which preceded our publication. My thanks to Dean and Charlie for their thoughtful input to the historical perspective of investment management.

Tax-Rate Arbitrage: Realization of Long-Term Gains to Enable Short-Term Loss Harvesting

by: Lisa Goldberg, Taotao Cai and Pete Hand

We look at an enhanced loss-harvesting strategy, tax-rate arbitrage, which exploits the differential between short- and long-term tax rates. In ourstudy, we examine tax-managed strategies over numerous historical periods. For the ideal tax-rate arbitrage investor, one who is subject to the highest federal-only 2020 tax rates, who has a long horizon and a planned liquidation date, and who launches the strategy from all cash, tax-rate arbitrage generated an average of 0.78% in excess after-tax active return at a 10-year horizon relative to a standard loss-harvesting strategy. Other investors with different profiles may benefit from tax-rate arbitrage but typically to a lesser extent.

Portfolio Performance Attribution via Shapley Value

by: Nicholas Moehle, Stephen Boyd and Andrew Ang

We consider an investment process that includes a number of features, each of which can be active or inactive. Our goal is to attribute or decompose an achieved performance to each of these features, plus a baseline value. There are many ways to do this, which lead to potentially different attributions in any specific case. We argue that a specific attribution method due to Shapley is the preferred method, and discuss methods that can be used to compute this attribution exactly, or when that is not practical, approximately

Just Say No to Leveraged ETFs

by: Ziemowit Bednarek and Pratish Patel

The daily return on a positive Leveraged Exchange-Traded Fund (LETF) is a multiple of its benchmark. We compare the risk–reward trade-off of investing in an LETF relative to the benchmark. The main contribution is straightforward: Sharpe Ratio (SR) adequately and sufficiently captures the trade-off. An LETF return distribution differs from the benchmark by location and scale. As a result, LETF and benchmark have the same higher-order cumulants. A wide variety of coherent performance measures monotonically depend on the SR. For all horizons, the LETF SR is lower than the benchmark. We find strong and robust empirical support for these predictions.

What’s in the Moneyness? Moneyness Spread and Future Stock Returns

by: Zhan Li

There exists a significant and positive cross-sectional relation between moneyness spread and future stock returns. Stocks with high moneyness spread outperform stocks with low moneyness spread, measured by raw and risk-adjusted returns. This predictability can last for at least 15 days, and the predictability of open interest-weighted moneyness spread is more persistent than that of dollar-volume weighted moneyness spread. The long–short portfolio, which buys stocks in the top decile and shorts stocks in the bottom decile, outperforms the market. After accounting for transaction costs, this outperformance continues to hold except the daily-rebalanced portfolio based on dollar volume-weighted moneyness spread.

Passive Versus Active ESG Investing: How a Small Hedge Fund Converts an Oil Giant

by: Ye Cai and Seoyoung Kim

“Case Studies” presents a case pertinent to contemporary issues and events in investment management. Insightful and provocative questions are posed at the end of each case to challenge the reader. Each case is an invitation to the critical thinking and pragmatic problem solving that are so fundamental to the practice of investment management.

Investing Amid Low Expected Returns

by: Antti Illmanen • reviewed by: Zachary Crowell

“Book Reviews” identifies important, and often popular, new books from a wide range of investment topics. Beyond providing a summary and review of the content and style of the books, “Book Reviews” seeks to contribute to a conscious, critical, and informed approach to investment literature.