1 “Market impact” refers to the fact that when someone buys or sells a stock, that very activity affects the price of the stock. When a manager buys, the increased demand causes the price of the stock to rise slightly, meaning that the management firm pays more for the stock than the market price before it placed its order. Similarly, when a manager sells a stock, that activity depresses the price of the stock slightly, causing the manager to receive less for the stock than the prevailing market price before it placed the sell order.
2 Opportunity cost refers to the loss of value that occurs between the time a manager decides to buy or sell a stock and when the transaction actually occurs.
3 Note that clients often include low-cost-basis securities in these types of portfolios, hoping that tax harvesting elsewhere will allow the low-basis stocks to be diversified over time at a low tax cost.
4 Investors cannot simply sell a stock on day one and buy it back on day two—the so-called “wash sale rule” prohibits such purely tax-motivated selling. The rules require investors to wait a minimum of 31 days before buying back the same stock they have just sold. There are, however, many ways to maintain essentially the same investment exposure without actually owning the stock—by buying a very similar stock, for instance, or buying an exchange-traded security that is highly correlated with the stock.
5 See Chapter 18 for a discussion of the use of directional (long/short) hedge funds ...