How are funds kept within the DAF? If it’s not being held in an aggressive investment then we’ll want to make the donation as late as possible before the draw.
Also: is there no type of financial instrument that will offer extremely high short term variance without reducing expected value?
The donations will be invested in equities (some US, some international, some emerging). Returns between the donation and the drawing seem like a very minor consideration, maybe you are looking at 0.5% in expectation, or more like 0.1% for investors with access to leverage.
There are high variance financial instruments in the derivatives space, but you need to have the right financial accounts, EV is negative, and generally there are various kinds of hassle. But it’s an option.
For some assets you could donate the upside while selling on the downside to take a loss, so it could actually be more tax-efficient. This probably requires a year of foresight though + rules out some options.
I think that in general lottery-ticket assets tend to be pretty expensive. Also, if the volatility is correlated with the market, then there are further problems from correlations between your returns and other donors’ returns.
If you had the right financial accounts, you might just short something, because that’s very high variance and anticorrelated with other donors.
edit: actually as Michael points out, it has the same variance (though it has more extreme downside risks)
Oh good point, shorting has more extreme downside risks but the same variance. I wonder if shorting causes you to reach the point where you double or lose your pot any quicker than going long.
How are funds kept within the DAF? If it’s not being held in an aggressive investment then we’ll want to make the donation as late as possible before the draw.
Also: is there no type of financial instrument that will offer extremely high short term variance without reducing expected value?
The donations will be invested in equities (some US, some international, some emerging). Returns between the donation and the drawing seem like a very minor consideration, maybe you are looking at 0.5% in expectation, or more like 0.1% for investors with access to leverage.
There are high variance financial instruments in the derivatives space, but you need to have the right financial accounts, EV is negative, and generally there are various kinds of hassle. But it’s an option.
For some assets you could donate the upside while selling on the downside to take a loss, so it could actually be more tax-efficient. This probably requires a year of foresight though + rules out some options.
I think that in general lottery-ticket assets tend to be pretty expensive. Also, if the volatility is correlated with the market, then there are further problems from correlations between your returns and other donors’ returns.
If you had the right financial accounts, you might just short something, because that’s very high variance and anticorrelated with other donors. edit: actually as Michael points out, it has the same variance (though it has more extreme downside risks)
Going short on an asset has the same variance as going long, but with opposite expected value (actually slightly lower because of borrowing costs).
Oh good point, shorting has more extreme downside risks but the same variance. I wonder if shorting causes you to reach the point where you double or lose your pot any quicker than going long.
Also very negative expected value though.