Wes Gray 🇺🇸

Lots of chatter on ETFs being seeded via 351. Makes sense-we've seen a large increase in activity (and press e.g., @justinaknope @denitsa_tsekova). Here is an older article that talks about the top 10 ways to screw these up. etfarchitect.com/top-10-ways-to… Note: Economic substance is on the list

@epnohelty How do you come to that conclusion ? Am equal weight portfolio of 11 stocks hits the diversification definition. Broad indexes, even if top heavy, pass diversification easily

Based on these rules an S&P 500 indexed account would struggle to qualify for 351 exchange!

Tl:dr. 351 is NOT a tool for sper concentrated positions

Diversification is a core requirement of a 351 exchange. Before assets can be contributed, the portfolio must satisfy specific IRS diversification tests. This video explains how those rules work in practice. The two key tests: The 25% Rule - No single security can represent more than 25% of the contributing portfolio. - Large, concentrated positions may need to be partially excluded. The 50% Rule - The combined weight of the five largest positions must remain under 50%. - Portfolios with fewer than approximately ten holdings often struggle to qualify. Additional considerations covered in the video: - ETFs are evaluated on a look-through basis - Overlap between ETFs and individual stocks matters - Cash and recently acquired government securities do not count toward diversification - Certain assets - including mutual funds, private assets, crypto, and derivatives, are ineligible Watch the video to see how diversification is evaluated before a 351 exchange. More detailed examples, visuals, and FAQs are available in the 351 Education Center: hubs.la/Q03ZF7nj0

@TaxAlphaInsider @FutureProof_HQ They also said they wouldn't charge 15% rev share like Fidelity when Fidelity was getting steamrolled in the press on that issue...now they say they need to look into that charge. I don't trust any broker/dealer / custodians!!!

In case you missed it, at @FutureProof_HQ good interview on tax-aware long/short: Schwab CEO "We’d love to support you."

@KenNuttallFP @choffstein @HML_Compounder an 8lb gorilla suit would be an interesting costume...

@choffstein @alphaarchitect @HML_Compounder you are wearing a gorilla suit? need to see pics at teh next conference

DFA entering the Section 351 game... sec.gov/Archives/edgar… A smart move after their attempt at an exchange fund.

@ptuomov @HML_Compounder yeah, that pretty much sums up the game.

@alphaarchitect @HML_Compounder The only way for the small guy to win is to keep innovating and a step ahead of the big guys until the small guy becomes a big guy. Then start playing that big-guy defense and clipping coupons!

@JeremyDSchwartz isn't that just leveraged global equity? i thought the idea of 'return stacking' was to bolt on uncorrelated stuff.

Our latest 90/60 ETF idea out today This idea came from a client in our capital efficient overlays w/ gold. Problem: current portfolio was 100% US stocks --likes idea of adding international, but doesn't want to sell US core. Solution: Capital efficient Intl overlay >>>

@TaxAlphaInsider @ColeWilcoxCIO yeah, add that line under the LP section. Doubt that is ever happening in RIC land

@ColeWilcoxCIO Now we're talking. I'll follow up.

I'm very interested in managed futures as portfolio diversifiers. There are some gnarly corners, but how these things are taxed is pretty straightforward once you understand it's a function of the wrapper. @ColeWilcoxCIO how could I improve this?

@HML_Compounder btw, that isn't specific to any particular 800lb gorilla, but a standard economic approach in oligopolistic markets

@HML_Compounder what else is new. The standard economic model for 800lb gorillas: 1. talk trash about any innovation, try and bury innovators with misinformation and PR camaigns. 2. Pivot if the innovation is successful; pretend like you invented the innovation. 3. rinse,repeat

@TaxAlphaInsider This is whisper down the lane, and based on anecdotal evidence, but I guess it didn't work out as anticipated. You can probably work your network of RIAs to get ground truth

@alphaarchitect Yeah, what happened with the exchange fund?

@TaxAlphaInsider @DeathStripMall Yeah, I can see that if you are willing to bear the swap spread costs, counterparty risk, and figuring out how to get swaps @ cap gains tax. Never really was comfortable with that tbh but maybe someone can figure it out!!!

@alphaarchitect @DeathStripMall Story on this coming soon... teaser: swaps + APs.

I'm on a managed futures kick, but needed to start from first principles. Here's a visual illustrating how a single regulated futures contract is taxed. Notice the basis adjustment at year-end and 60/40 LT/ST Section 1265 treatment. No straddle rules... yet. Example from IRS Pub 550.

@TaxAlphaInsider @DeathStripMall the big solve would be in the RIC structure but the bad income problem is a big one. for an SMA, yeah, compile your mgd fut + L/S TLH and you are cooking with grease. if someone solves the RIC aspect i'd be impressed. been pondering for many years

@DeathStripMall On its own, no. With long/short, it could be. With a new innovation that's coming soon, yes.

@justinaknope @denitsa_tsekova Who does the art over there? Pretty creative bunch!

@denitsa_tsekova BALLER

If investment alpha's so hard, try...tax alpha? .@denitsa_tsekova and I wrote about the latest craze on Wall Street for "tax efficiency": 351 ETF conversions, tax-aware long-short, trader funds etc (which comes with a few *wild* illustrations like this one)

@RyanPKirlin Hit em straight!

Happy St. Patrick’s Day! ☘️🇮🇪 I’m in the motherland for the event this year. Dublin, Ireland. Will be live tweeting the event.

@DanRusso_CMT Condolences

Rest well my Lola Bear! We will miss you!

@arbseekerguy @rev_cap Coordinate with some like minded folks , achieve scale, and identity the business opportunity. Magic. U r in biz!

@alphaarchitect @rev_cap Dreams of running my PA in an ETF wrapper to minimize my tax bill have been shattered.

@TaxAlphaInsider @rev_cap Yes, and corporate governance mechanisms in place via 40 act, which essentially mandate inefficiency. If folks dont want redtape u go unregistered funds, ie hedge fund. But even LP ops, full baked, aren't cheap. But much cheaper than registered funds

@alphaarchitect @rev_cap Red tape is the ultimate blocker? Insert "always has been" spaceman meme.

One can be sure we are tinkering, thoughtfully, with every efficiency hack imaginable, but the issues in our biz are often not challenges solved by tech/AI. Those can help, at the margin, and inflation will be head at bay, but doubful that launching registered funds will ever be "cheap"

@alphaarchitect @rev_cap Awesome. I was wondering the same thing Rev.m about etf costs. Thanks Wes