SWAP

I guess this is a long-shot, however, as an individual investor, how can I even get exposure or into a swap? Thanks

Er, what kind of swap? Though your baseline rates will vary, you can always construct a synthetic swap from the pieces. E.g. borrow money on your LIBOR-based HELOC and invest it in long bonds for an IR swap. Or use a car (you’re short XB1) and buy CL1 exposure for a crack spread.

the real answer is you probably shouldn’t

Big Nodge Wrote: ------------------------------------------------------- > the real answer is you probably shouldn’t You are right. I had client asked me how, I had absolutly no idea.

DarienHacker Wrote: ------------------------------------------------------- > Er, what kind of swap? > > Though your baseline rates will vary, you can > always construct a synthetic swap from the pieces. > E.g. borrow money on your LIBOR-based HELOC and > invest it in long bonds for an IR swap. Or use a > car (you’re short XB1) and buy CL1 exposure for a > crack spread. Let’s say…stock return for index return to diversify concertrated stock holding.

short the stock, buy the index.

DarienHacker Wrote: ------------------------------------------------------- > short the stock, buy the index. You brought up a good topic. Stocks are easy to short, but index is hard to buy. I guess a particualar ETF can get close to the return of a particular index.

That probably won’t work for the client. They will be deemed in constructive receipt if the short the same stock they own (I am not sure on this), which will cause the entire positions to the extent it was shorted to become taxable. IRS publication 550 has details. Someone with more knowledge on tax may know for sure.

mwvt9 Wrote: ------------------------------------------------------- > That probably won’t work for the client. They > will be deemed in constructive receipt if the > short the same stock they own (I am not sure on > this), which will cause the entire positions to > the extent it was shorted to become taxable. > > IRS publication 550 has details. > > Someone with more knowledge on tax may know for > sure. Learn something new! Well, back to squre one, entering into swap doesn’t generate this kind of tax implicaiton. How can an individual client pay the stock return for index return in a tax efficient manner?

i think you can give stock as a gift (up to $12k) w/o paying taxes on it. but i dont really know how this works… so you should check it out (maybe theres a CFP or CPA on here that would know?). if that was the case, you could match two retail investors. one who owned the stock and the other that owned the ETF and then they could “gift” it to each other. but again, i’m not tax professional and i just briefly read something about no gift tax on stocks a while ago.

You can gift a lot of money without paying taxes on it. This has to due with estate tax rules that are going to sunset in 2010. I don’t have the energy to write it all out now…and nobody would read it anyway. :slight_smile: Nola is talking about gifting up to 12,000 without using up any of your unified credit. This can be done for mutiple people. So i can give 12K to you and 12K to him, etc. This can be done each calendar year (assuming you file your tax rtn on a calendar year). This probably isn’t practical for your client.

interesting mwvt. i imagine its not practical for most clients. difficult to find a match. would be interesting if there was some sort of website that would facilitate something like this. (assuming there really arent any tax implications). prob wouldnt be any commissions either (although the website would probably charge a fee). no commissions and no tax on all stock “gifts” of $12k or less. not bad.

Thanks for all your input…I hope this post doesn’t drift toward to tax planning. However, I am still not sure about any tool that is availalbe to retail investor can use (equity swap in this case, or a synethic position) to diversify their holdings without complication for taxes. It is not likely a retail investor can call up a swap dealer to arrange a $1Million NP equity swap.

“You brought up a good topic. Stocks are easy to short, but index is hard to buy. I guess a particualar ETF can get close to the return of a particular index.” Wait… the index should be easy to buy… did you mean index is difficult to short? Yes, then there are ETFs you can use - you can short them, and some even mimic a shorted index, so you buy it to get short exposure. Also, with ETFs, you lose 30-100 bps in fees, depending on the provider, and if there is much tracking error, you don’t get an exact match. However, buying a normal index has fees and transaction costs too, so it may be a wash.

Can you give us a bit more color about the client? So far it seems he’s concentrated and either unwilling or unable to sell the position (which would be the first recommendation). There was an L3 exam question this year about diversifying a concentrated position for a small business owner, and considerable discussion on that forum in June about the best answer. Also the L3 materials cover this issue, so you might redirect over there in any case to pick people’s brains. Alternatives include one-sided derivative baskets (collar), shorting a similar stock, pool arrangements, and other tricks I’ve forgotten. PWM tax accountants are pretty knowledgeable about ways to this since they deal with business owners in exactly the same situation all the time. Since tax law and interpretation shift constantly your client is best off going to a professional to weigh the alternatives.

bchadwick Wrote: ------------------------------------------------------- > “You brought up a good topic. Stocks are easy to > short, but index is hard to buy. I guess a > particualar ETF can get close to the return of a > particular index.” > > Wait… the index should be easy to buy… did you > mean index is difficult to short? Yes, then there > are ETFs you can use - you can short them, and > some even mimic a shorted index, so you buy it to > get short exposure. > > Also, with ETFs, you lose 30-100 bps in fees, > depending on the provider, and if there is much > tracking error, you don’t get an exact match. > However, buying a normal index has fees and > transaction costs too, so it may be a wash. You are right, my should be more clear. Shorting stock is easy, no tracking error, little fee involved. However, buying index (ETF index fund) involves tracking error and higher fees. That is what I meant by not as easy to buy a “true” index comparing to short a single stock.

If the client’s problem is tax upon realization of the sale of his concentrated position, a variable pre-paid forward may work. It is a stock collar with a forward sale. He would receive cash now for the position (discounted), while the actual sale would be in say 5 years. There was another thread not that long ago about this.

To mwvt9 the pre-paid forward idea seems may fit the bill.

To DarienHacker The client is pretty much in the same situation as the one described in LIII this year. Small business owner who has a very large position in a single stock, wanting to diversify, (not willing to sell, doesn’t want to realized tax, cheap about buying puts to protects posistion). I know that SWAP is “costless” to enter. Basically looking for a solution for somebody not willing to pay anything. Pretty typical for a retail investor.