ETFs For Scaredy-Cats

You want to get a piece of the bull market while eliminating catastrophic losses? Follow the lead of Twenty-First Securities.

- William Baldwin

In a toppy market, investors suffer terrible mental torment awaiting the next crash. Ministering to them is Robert N. Gordon, portfolio doctor.

One patient: a forlorn taxpayer sitting on a highly appreciated $51 million collection of blue chips. Using a deft combination of put and call options, Gordon has all but locked in the gain while sidestepping tax rules designed to punish people who hedge away their risk.

Gordon works with a lot of investors like this one. “The last thing they want to do is pay a capital gain tax, but they want to lighten up,” he says.

Gordon is president and owner of Twenty-First Securities, a boutique broker in New York City that handles difficult trades, the ones requiring a knowledge of both option math and tax law. At one point his firm was overseeing $5 billion in short sales against the box, which until 1997 was a way to defer capital gains taxes by holding long and short positions simultaneously. Congress ended that particular tax dodge, but Gordon has a lot more in his surgical kit.

As a niche broker specializing in arcane tax-avoidance techniques, Gordon is like a Talmudic scholar when it comes to the tax code. For example, he knows, inside and out, Reg. 1.246-5(c) (1)(iii)(B), which sets out when a tax-sparing hedge crosses the line into a forbidden straddle. But he is also adept at the glad-handing side of the brokerage business.

One lead came in from a course on investment taxation that Gordon teaches at New York University. A former student got in touch, asking whether a technique he remembered from class would be helpful when his family sold its hot-dog business. Twenty-First got that assignment. The value at stake ran to nine figures.