Hedging Strategies; How to Hedge Unrealised Gains Message Board

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Strategies & Market Trends : Hedging Strategies; How to Hedge Unrealised Gains

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To: Topannuity who wrote ()	12/26/1999 10:58:00 AM
From: Topannuity	of 26

From: Bahama Saturday, Dec 25 1999 6:05PM ET Let's say you have 200,000 in taxable gains to use round numbers. At 39% tax rate you'd owe 78,000. Hedging until you reach the 28% tax rate hold time, you'd owe 56,000 in tax next year. The net 'savings' would be 78k-56k=22,000. To cause a loss equal to this savings in your 350k portfolio would only take a 6.2% drop. Could happen in an instant with a gap down market open. If you could do a perfect hedge (i.e. penny for penny) where the total cost to you was under 22,000 (it sounds like you'd be doing this hedge on borrowed money, correct?) then it would be worth it. Since you can't do a perfect hedge using a proxy instrument, you have to assume a lower cost to you so that any mismatch in the hedge (i.e. not tracking perfectly the 2x price volatility re: NAZ) is offset. How would you know this offset? I don't know. My point is there is some amount of unquantifiable risk in this strategy that is probably greater that the 6.2% cost of higher tax bracket. A 6.2% mismatch wouldn't take much. Would you agree with this? If not please explain where my error in logic is. thanks

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