Bequest Mode - Liquidation Mode 25-Year Holding Period; Passive Strategy has 9% Appreciation, 1% Dividend Yield, and 5% Turnover FIGURE 32.1 Tax Hurdle: Excess Pretax Return Required to Match the After-Tax Return of a Passive Strategy and aggressive actively managed portfolios. The core portfolio allows the market's return to compound on a pretax basis. The after-tax return can be further enhanced through systematic tax loss selling. The satellite portfolios may allow for more extraordinary returns from active management but will likely generate a lot of realized gains. Two examples of satellite portfolios are: 1.    A market-neutral hedge fund that is long some stocks and short others, and balanced to eliminate market exposure. The investor will owe tax on any returns that the hedge fund manager can generate, but that will not subject the returns of the core index fund to taxation. This arrangement separates active management from equity exposure. 2.    A specialty fund such as active small cap. The portfolio manager can manage the portfolio aggressively because the core index fund has already created diversification. The strategy will generate realized gains but may also generate excess returns. The core and satellite approach should allow much of the market's return to compound on a pretax basis in the core portfolio. In addition, it may allow for more effective asset location strategies. Breaking the equity holdings into a tax-efficient core and tax-inefficient satellites may allow for positioning the tax-inefficient satellites within tax-advantaged entities. The last point is particularly important. In many cases there are legal or practical considerations that limit how much of an investor's wealth can reside inside of tax-advantaged entities. Thus, there is a limit to how much of the investment port-