Ha... tax-aware long/short is growing faster than I thought

The leaders are pulling away

Brent Sullivan

Aug 15, 2025

AQR: The Impact of Liquidation Taxes on the Lifecycle Benefits of Tax-Aware Long-Short Strategies
AQR: Rebuffed: An Empirical Review of Buffer Funds (I got a little shoutout in this one for my work buffer fund tax efficiency)
Bitcoin shorting against the box
Nick Maggiulli The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life Hardcover (Nick is my and
Andre Nader
’s pod next week)

Step aside direct indexing

The beauty of social media is that people just tell me when I’m wrong.

Here’s an update on tax-aware long/short AUM per friendly feedback over the last few days.

If you're just tuning in, wondering what I mean by “tax-aware long/short,” here's a two-paragraph explanation, which should help you understand why wealth managers are salivating.

The gist is that investors can add a market-neutral “extension” to a portfolio of marginable assets (stocks, bonds, ETFs, etc.) that generates some alpha (AQR assumes 0.70% alpha, net of a 0.45% management fee per annum, on a 150/50 portfolio in its recent blog, see assumptions and construction details in the paper, pls) and a bunch of tax losses.

Income is a great problem to have. But it’s mostly intractable (from a tax perspective). Income hits (wages, interest, etc.) and you pay tax on it. Ever wonder why some CEOs take a $1 salary?

Capital gains are different. Their timing is mainly at the discretion of the investor.

A (nearly) unlimited supply of tax losses from a tax-aware long/short strategy increases timing flexibility for investors.

They can harvest a ton of losses very quickly (depending on markets, leverage, manager, their situation, etc.), while deferring gains. Then, they can wind down the leverage gradually (deliberately, carefully), while collecting portfolio returns all the while. Or just keep the leverage on indefinitely.

Here’s Larry Swedroe showing how people are using this stuff.

All of this comes with risk. Namely, tracking error. Plus some operational stuff, higher management fees, and financing costs.

Increasingly, folks wonder aloud to me “am I going to be married to [insert manager]?” The answer is a qualified “no,” but worth including in the diligence checklist.

Are the pretax alpha and harvested losses worth the risks and costs?

Maybe.

That’s a complex question that advisers and investors should put to the managers, with their fancy backtesters, directly.

“what could go wrong?”

I won’t try to answer that gigantic question in this post, but let me allude to the structure of the answer.

As with any tool:

The tool itself could fail
The environment could cause the tool to fail
The user could use the tool incorrectly

Now, generally, the questions around tax-aware long/short are about the tool failing. These are questions about short squeeze, tracking error, corporate actions, etc. Some of these problems are intricate, but they’re mostly well-understood.

Occasionally, someone will ask higher-level questions like, “How big could this strategy get?”, or “How does short rebate evolve if there’s so much short interest?”, and similar questions about the environment.

But, rarely, do people ask about how they could screw it up.

This includes questions like: