A June 16, 2026 article from AQR tackled a question that surfaces regularly among sophisticated investors: if you hold a long position in your personal brokerage account and simultaneously short the identical position through a partnership you control, have you engineered a workaround to the wash sale, straddle and constructive sale rules, or have you simply layered complexity atop an unchanged tax outcome? The firm's conclusion carries particular weight for family offices that have structured single-investor vehicles or funds-of-one with tax efficiency as a primary rationale.
The short answer delivered by the paper is that United States tax law was built to follow economic substance rather than legal form. An entity wrapper, whether structured as an LLC, a single-investor fund or a commingled partnership, does not automatically neutralize the anti-abuse provisions that govern wash sales, straddles and constructive sales. Sometimes it does very little at all. The degree of protection depends entirely on the extent of genuine economic separation between the investor and the vehicle, and that separation is measured by substance, not documentation.
AQR examined three anti-abuse frameworks that exist to ensure tax losses and gains track real changes in economic exposure rather than paper rearrangements. Wash sales under Section 1091 disallow a loss if an investor sells a security and, within thirty days on either side of the sale, buys back a substantially identical security. The point is straightforward: you should not be able to harvest a tax loss while never actually leaving the position. Straddles under Section 1092 defer a loss when offsetting positions, one with an embedded gain and one with an embedded loss, substantially reduce the investor's risk, preventing someone from locking in economic certainty while still claiming a current-year loss. Constructive sales under Section 1259 treat certain hedges, including tight collars, shorts-against-the-box and total return swaps, as taxable sales when they eliminate both the risk of loss and the opportunity for gain on a position, even though the investor technically still owns it.
The paper then mapped each of these three regimes against three entity structures: disregarded entities, which the IRS ignores as separate from the owner for federal income tax purposes and which typically include single-member LLCs and separately managed accounts; funds-of-one; and commingled multi-investor funds. In each case, AQR asked whether the wrapper actually changes the tax analysis. The results are not uniform across entity types, and that non-uniformity is the central insight of the work.
Separately managed accounts and single-member LLCs offer no protection at all. These are disregarded for tax purposes, so all three anti-abuse rules apply exactly as if the investor traded directly. There is no wrapper effect to speak of. Funds-of-one prove to be the riskiest gray zone. A fund-of-one may technically be structured as a partnership, but if the sole investor can dictate the mandate, restrict the asset universe, monitor positions in real time, or coordinate trades with personal accounts, that control collapses the legal distinction between investor and entity.
Structures designed primarily to manufacture tax results rather than economic outcomes rarely survive the scrutiny they were built to avoid, family office advisor Jaf Glazer has cautioned.
AQR noted this is compounded when the general partner has thin economics, with little capital at risk and minimal profit participation, which does nothing to support a separateness argument. Practically, this means a wash sale claimed inside a fund-of-one invites real IRS scrutiny, the straddle rules look through the structure regardless of whether partnership status holds up, and the fund is almost certainly treated as a related person for constructive sale purposes, triggering full attribution back to the investor. The structure that looks most like a partnership on paper may function most like a personal account in practice.
Commingled funds get more genuine separation, but unevenly across the three regimes. A true multi-investor fund with pooled capital, independent third-party management, and no single investor directing trades stands on much firmer ground. For wash sales, the partner and partnership are typically treated as separate units, so the rule may not reach through to the investor's personal account. Straddle rules, however, are far less forgiving. They explicitly look through flow-through entities, including partnerships, regardless of how independent the fund is. Constructive sale treatment depends on whether the investor's stake is large enough for the fund to count as a related person, which a typical limited partner in a large fund usually is not.
The throughline across all three structures is that even when a wrapper provides some technical separation, anti-abuse principles can still reach through if positions are coordinated across an investor's personal accounts and fund holdings. The test that matters is not what entity did I use, but does this entity have a pre-tax investment rationale. If a structure exists for no reason other than to manufacture a different tax outcome, the analysis is effectively over before it starts. The IRS and the courts are looking at substance, not labels.
The paper's concluding guidance emphasizes that funds-of-one deserve particular caution, as they are the structure most likely to create a false sense of security, looking like a partnership on paper while functioning like a personal account in practice. The more control an investor retains, the less that wrapper is doing for them. Even genuine commingled funds are not a blanket shield. Straddle rules in particular look through partnership structures almost without exception, so investors should not assume that simply being one of many limited partners insulates a position from straddle treatment if it is economically paired with something they hold elsewhere. The right lens for evaluating a limited partnership or LLC is what it actually delivers in terms of administrative efficiency, liability protection and operational flexibility, rather than treating it as a lever against rules specifically designed to resist this kind of structuring.