Filing one's income tax returns can be like getting your teeth cleaned. It's inconvenient but necessary. Like it or not, taxes are the price free enterprise pays for the "commons" of defense, justice, public health, and other stuff used by all players.
My tax burden was rather light in 2012 mostly because I deliberately chose not to execute any merger arbitrage trades in my portfolio. The opportunity cost of not playing some obvious low-risk events (well, obvious and low-risk for me alone) was probably significant. The risk for me of having my capital tied up in strategies I can't unwind is potentially much greater than that cost because I don't want to be caught in the middle of a major market dislocation.
Merger plays are low-risk in a stable macroeconomic environment. Our present environment is totally unstable. Its parts hold together with duct tape, bailing wire, and the prayers of a few dozen central bankers. If the market were to crash after I go long the stocks of announced acquisition targets, collapsing share prices may result in the merger's termination. I'd be stuck with outsized positions in a handful of firms outside my normal sphere of competence, at valuations much lower than whatever premium the acquirer would have paid. A merger-arb strategy in this kind of market is like picking up nickels in front of a steamroller. I'd rather leave the nickels in place than try to run ahead of the steamroller.
I also used to be a fan of using cash proceeds from option writing to add to fixed income holdings. I let the last of my bonds mature last year, and I'm staying away from dollar-denominated bonds. The risk of hyperinflation is more compelling than adding yield with a bond ladder.
I probably missed a great deal of potential gains by sitting on the sidelines this long. I have to live with this outcome. Hedge fund managers chasing yield and pension fund managers beholden to benefit payouts must also live with the extreme risks they are taking now. I believe my patience will be rewarded. I have waited a long time and I have further to wait.
My tax burden was rather light in 2012 mostly because I deliberately chose not to execute any merger arbitrage trades in my portfolio. The opportunity cost of not playing some obvious low-risk events (well, obvious and low-risk for me alone) was probably significant. The risk for me of having my capital tied up in strategies I can't unwind is potentially much greater than that cost because I don't want to be caught in the middle of a major market dislocation.
Merger plays are low-risk in a stable macroeconomic environment. Our present environment is totally unstable. Its parts hold together with duct tape, bailing wire, and the prayers of a few dozen central bankers. If the market were to crash after I go long the stocks of announced acquisition targets, collapsing share prices may result in the merger's termination. I'd be stuck with outsized positions in a handful of firms outside my normal sphere of competence, at valuations much lower than whatever premium the acquirer would have paid. A merger-arb strategy in this kind of market is like picking up nickels in front of a steamroller. I'd rather leave the nickels in place than try to run ahead of the steamroller.
I also used to be a fan of using cash proceeds from option writing to add to fixed income holdings. I let the last of my bonds mature last year, and I'm staying away from dollar-denominated bonds. The risk of hyperinflation is more compelling than adding yield with a bond ladder.
I probably missed a great deal of potential gains by sitting on the sidelines this long. I have to live with this outcome. Hedge fund managers chasing yield and pension fund managers beholden to benefit payouts must also live with the extreme risks they are taking now. I believe my patience will be rewarded. I have waited a long time and I have further to wait.
