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READING 13: CONCENTRATED SINGLE ASSET POSITIONS - Coggle Diagram

- - - - select the tool or strategy that maximizes after-tax value for the investor.
    - - a/ Index tracking with active tax management
        
        Cash from a monetized concentrated stock invested to track a broad market index on a pretax basis and outperform the index on an after-tax basis. For example, if dividends are taxed at a higher rate than capital gains, the tracking portfolio could be structured with a lower dividend yield but higher expected price appreciation.
      - b/ A completeness portfolio
        
        structures the other portfolio assets for greatest diversification benefit to complement (complete) the concentrated position. For example, if the concentrated position is an auto stock, the rest of the assets are selected to have low correlation with auto stocks .
      - Exchange funds
        
        Consider 10 investors, each of whom has a concentrated
        position in a single stock with a low cost basis. Each investor:s position is in a different stock. The investors contribute their holdings into a newly formed exchange fund, and each now owns a pro rata share of the new fund.
        If investor H had a position worth EUR 5,000,000 with a cost basis of EUR 500,000 and the total value of the new fund is EUR 100,000,000, she now owns 5% of the new fund
        at a cost basis of EUR 500,000. The investor now participates in a diversified portfolio and defers any tax event until shares of the fund are sold.
  - - - Step 1: Hedge a large part of the risk in the position
        If a perfect hedge removes all risk, it may be taxed as a sale
        
        HEDGE THE ASSET VALUE
        
        modified hedging to minimize downside risk while retaining upside in the underlying position
        
        Protective puts
        
        add "knock-out put" to lower cost
        
        expires prior to its stated expiration if the stock price rises above a specified level
        
        Zero-premium collars
        
        Covered calls
        
        Create yield enhancement
        
        Prepaid variable forwards (PVF)
        
        04 tools can be considered for hedging the asset.
        
        Short sale against the box.
        
        Equity forward sale contract
        
        Forward conversion with options
        
        Total return equity swap.
        
        Cross hedge
        
        The investor who holds a
        large position in an auto stock but finds it cannot be shorted to create a hedge could consider three cross hedge possibilities:
        
        1.Short shares of a different auto stock or another stock that is highly correlated with the
        concentrated position
        
        Short an index that is highly correlated with the concentrated position
        
        Short an index that is highly correlated with the concentrated position
      - generally involves receiving cash for a position without triggering a tax event
      - Step 2: Borrow using the hedged position as collateral.
      - Selecting the tool will depend on tax treatment