R31: Concentrated Single Asset Positions Flashcards
What are the objectives when reducing concentrated positions?
Reduce risk of wealth concentration
Reduce tax impact
Generate cash
What are some constraints of reducing concentrated positions?
Tax Liquidity Contractual restrictions Capital market limitations Regulations Margin lending rules
How can you convince investors to reduce concentrated positions?
Goals-based planning - primary capital vs surplus capital.
Personal risk
Market risk
Aspirational risk
Where can you allocated assets before or after asset appreciation?
Before: direct gift, estate freezes (keep voting ones)
After: family limited partnership (marketability and minor interest discount)
What are the strategies for a concentrated position in common stock?
- Monetisation
- Hedging
- Yield enhancement
Strategies within equity monetisation?
- Short sale against the box
- Total return equity swap
- Forward conversation with options
- Ewuity forward sale contract
Strategies within hedging?
Buy puts
Zero dollar collars
What does yield enhancement involve?
Covered call. Helps prepare investor mentally for eventual sale. Can be LT programme. Yield through premium.
What’s a prepaid variable forward?
Combine hedge and monetisation- collar + borrow value of hedged position.
Investor agrees to sell variable n. Of shares in the future and receives a loan at the time of the PVF initiation.
0ther tools to combine investment and tax efficiency decisions?
- Index tracking with active tax management
2. Completeness portfolio
What are exchange funds?
Structured as partnership. Contribute small position of concentrated, so diversified portfolio. Not taxable but remain for 7 years.
Monetisation for private businesses?
- Sale
- Recapitalisation
- IPO
- Disinvestiture
- Collateralised borrowing
Monetisation for RE?
- Mortgage financing
- Trusts
- Sale and leaseback
What’s mismatch in character?
G/l of underlying and those of the hedge not treated the same for tax purposes
