There are three types of investments when it comes to taxes.
1. Tax Inefficient
These are strategies where a big portion of the return gets siphoned off to taxes.
Examples:
- Bonds
- Private credit
- High-turnover active equity strategies
- Many hedge funds
There’s a return… and then a chunk disappears to taxes.
2. Tax Efficient
These investments minimize tax drag.
Examples:
- Index funds
- Municipal bonds
- Real estate (Through a private REIT)
The pre-tax and after-tax return look fairly similar.
3. Tax Beneficial
This is where things get interesting.
These strategies can actually create net tax savings while generating returns.
Examples:
- Tax-aware long/short equity
- Tax-aware hedge funds
- Direct real estate (or GP/LP structure) with depreciation
Instead of return minus taxes, you can get return plus tax savings.