Runaway Growth
A tax-aware long-short separately managed account borrows money to layer long and short stock positions on a client’ s portfolio, doing so to generate a steady stream of tax losses. Unlike plain tax-loss harvesting, which often runs out of stocks to sell at a loss after the market has risen long enough, the short side in this strategy can keep generating losses in a rising market indefinitely, since a short position loses money exactly when the market goes up.
Boston research firm Cerulli Associates began tracking the category in the fourth quarter of 2025, giving the industry its first comparative data in the first quarter of 2026. With $ 116.5 billion, tax-aware long-short debuted as the fourth-largest asset class among manager-traded separately managed accounts, ahead of categories that have existed for two decades such as large-cap core( with $ 84 billion) and taxable balanced( with $ 68.1 billion).
According to Brett Hillard, chief investment officer at GLASfunds, a Cleveland-based fintech that helps financial advisors long positions. So a manager might turn $ 100 of a client’ s longonly position into a $ 200 long exposure using the proceeds from the $ 100 short sale— keeping the same net exposure while tripling gross exposure, Fleissig says.
Such leverage does double duty for tax purposes, since the borrowed long position raises the account’ s cost basis, so more dollars can be sold at a loss before the portfolio“ ossifies,” or runs out of losses.
Aaron Brachman, a founding partner at D. C.’ s Washington Wealth Group of Steward Partners, offers a simplified example: say, when you buy Exxon Mobil but short Chevron. When oil prices push the short into a loss, you can harvest that loss while also rotating into a new short position, then repeat.
“ Tax-loss harvesting strategies have been around for a really, really long time, but the problem was that after about seven or eight years, you weren’ t really getting any losses from it,” he says, since the market has continued to rise.“ When you’ re doing a long-short, you’ re now able to deduct more losses over a much greater period.”
“ Tax-loss harvesting strategies have been around for a really, really long time, but the problem was that after about seven or eight years, you weren’ t really getting any losses from it [ since the market has continued to rise ]. When you’ re doing a long-short, you’ re now able to deduct more losses over a much greater period.”
— Aaron Brachman, a founding partner at Washington Wealth Group of Steward Partners
and RIAs manage long-short strategies alongside a client’ s other alternative investments, overall assets in the tax-aware longshort space have grown from roughly $ 1 billion in 2020 to more than $ 150 billion today. And just two managers, AQR Capital Management and Quantinno Capital Management, account for more than $ 100 billion of that.
Quantinno co-founder Hoon Kim reportedly conceived the strategy when he was at AQR. Kim’ s former firm is now the 900-pound gorilla, having held nearly $ 70 billion by last year’ s third quarter, according to the financial planning site Kitces. com. Other players include BlackRock’ s Aperio unit, Parametric / Eaton Vance, Invesco and Gateway.
The surge has happened not because the strategy boasts great returns. That was never the point: A portfolio split across hundreds of long and short positions is not designed to deliver eyepopping gains the same way a concentrated bet would.
“ It’ s not a sexy 50 % return story,” says Scott Smith, a senior director at Cerulli Associates.“ It’ s a‘ I made what the S & P did plus 1 %, but I also saved $ 50,000 on taxes’ story,” he says.“ That’ s the number that’ s going to stick in a client’ s mind.”
Why It’ s Tax Deferral, Not Elimination So what are the mechanics of the strategy? They might be less complicated than people think:
In a tax-aware, long-short strategy, a firm holds long positions but also borrows on margin from the custodian, shorting stocks and using cash from the short sales to buy“ extended”
Whoever developed the idea of going long and short at the same time while looking through a tax lens was“ brilliant,” says Andy Pratt, a partner and director of investment strategy at Burney Wealth Management in Reston, Va., one of the most established firms known for this technique.“ Essentially what that does is on the short side. You can continue to tax-loss harvest almost indefinitely on that side because the stock market is biased to the upside,” he says.“ So that really unlocked the potential.”
AQR’ s own research quantifies the difference. A standard direct-indexing portfolio plateaus at only some 30 % in tax loss harvesting from invested capital in cumulative losses, while a leveraged long-short structure can reach 100 % in under three years.
That eagerness to generate losses feeds the most common misconception among investors and even among some advisors, sources say. It’ s a myth that the strategy erases taxes.
“ It doesn’ t eliminate taxes. It’ s a tax-deferral strategy,” says Kevin Benson, a partner at Plante Moran Financial Advisors in Southfield, Mich.“ What you end up with is a portfolio of larger embedded unrealized gains that later have to be unwound.” Sell too soon, he says, and the deferral window can be as short as a single tax year.
There is one true exception: death, when a step-up in basis wipes out the deferred gain. This is why advisors describe the strategy as built to be held for decades, ideally for a client’ s life.
The tax benefit also cannot be the entire point, legally. Under the economic substance doctrine, a manager cannot design
38 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER / OCTOBER 2026 WWW. FA-MAG. COM