When a Tax-Aware Long-Short Strategy Makes Sense

Advisors are increasingly using tax-aware long-short strategies to reduce concentrated stock risk while deferring capital gains. Industry estimates put more than $150 billion into these approaches this year across managed accounts and private funds.

A common format is 130/30: short roughly 30% of portfolio assets and use margin to buy an extra 30%, producing about 130% long exposure and 30% short exposure. Some firms employ higher-leverage versions such as 250/150. These structures can create realized losses from short positions while keeping market exposure and postponing tax on gains.

Custodians and asset managers have adjusted product lines to meet demand. One large bank introduced a long-short separately managed account product this year and plans a custody-facing asset management option next month. At the same time, another major custodian closed its long-short SMA to new accounts and a different firm imposed limits, prompting some wealthy clients to open accounts at multiple custodians to access preferred terms.

Advisers say the strategy is most used when clients expect a major taxable event, such as selling a business, and want capital losses to offset future gains. One capital markets platform founder described a method in which a client borrows against company stock, shorts other securities and adds diversified long positions so losses from shorts can offset gains tied to the concentrated shares.

Automation has helped scale the approach. A recent survey of asset managers found 79% have automated tax-loss harvesting, making it easier to run rules-based long-short programs inside managed accounts and private vehicles.

Practitioners note operational and tax complications. Exiting leveraged long-short positions can be difficult. Andy Pratt, managing partner and director of investment strategy at Burney Wealth Management, using a modest 130/30 approach, warned that “once you get in, getting out of it does become a challenge.” He added that heavy use of margin can effectively lock an investor into the strategy unless they accept paying the deferred taxes.

Other tax planning options remain. Some advisers point to waiting for a basis step-up at death or realizing gains on shares that already have a high cost basis as alternatives. Independent tax analyst Brent Sullivan estimated the category has attracted more than $150 billion in net assets this year.

Advisers and industry figures recommend firms build clear rules for leverage, define how losses will be harvested and set an exit plan before placing clients into tax-aware long-short strategies.