Long/short: alpha acts like a cash infusion
Leverage targeting
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Let’s say you have a direct indexing portfolio that has grown well beyond its cost basis.
You could add cash to the portfolio. The manager would take the cash and invest it. Since the investments are fresh (i.e., close to their cost basis), normal market volatility will likely push some names below cost basis, creating tax-loss harvesting opportunities.
Another approach is to add margin and short positions, transforming the direct index into a long/short strategy.
Tax-aware long/short assets are well above $150 billion now. You can get up to speed on tax-aware long/short here.
Just like a cash infusion, positions acquired with margin and new short positions haven’t appreciated yet. They have full tax-loss harvesting potential.
There’s a similar dynamic at play when a manager generates alpha.
