COVER STORY the long and short legs to perfectly cancel each other out, says Adam Grealish, head of investments at custodian Altruist in Culver City, Calif., which is building toward its own long-short offering later this year.
There has to be a credible, good-faith attempt at achieving investment returns independent of the tax benefit, or the IRS can disallow the losses. Several advisors, including Fleissig, say it’ s an open question whether the IRS or Congress will eventually ban the strategy through regulation or legislation.
But for now this legal requirement also doubles as a marketing distinction, Pratt says. His firm began running long-short portfolios in 2017 to express bearish calls efficiently, years before“ tax-aware” became the industry’ s preferred term.
“ First and foremost, it’ s an investment strategy,” Pratt says.“ And initially for us, we didn’ t talk about it as being tax-aware. We were doing this for performance reasons.”
How Advisors Actually Use It
Ask five advisors how they use tax-aware long-short and what emerges are five different approaches based on clients’ varying risk tolerances, from those who are most cautious to those most comfortable with leverage.
For Fleissig, whose firm’ s average client has more than $ 100 million in investable assets, long-short is a narrowly applied tool, not a default for all clients. Pathstone built its own technology for unlevered, portfolio-wide tax-loss harvesting, and is comfortable putting 30 % to 40 % of most clients’ portfolios in that strategy.
But clients who qualify for the long-short treatment typically will see it applied to just 5 % to 10 % of non-retirement assets, and they should have cash coming in to refresh the account’ s basis, which could be the case with private equity partners collecting carried interest every year.“ It’ s not in everyone’ s portfolio,” Fleissig says.“ It’ s also a little hard to understand.”
He does not recommend the tax-aware long-short strategy for those with less than about $ 10 million in net worth, citing the complexity and illiquidity it creates. Unwinding a portfolio of shorts and longs both sitting on gains, he says, can leave an investor with a tax basis much lower than perceived, a recapture he compares to real estate depreciation coming due at once.
That said, other advisors are comfortable offering the strategy to clients with $ 10 million in assets, and some even less than $ 5 million.
Clients at Plante Moran average $ 6 million in investable assets, and Benson treats the strategy less like a standing allocation and more like a tool for a specific set of circumstances: a business sale; when a client needs to diversify a concentrated position; or when an elderly person is deferring taxes in their last years until death provides a step-up in basis( a true tax elimination scenario as opposed to deferral). The step-up in the last case applies only to the account holder’ s own assets, so it has to sit in that person’ s individual account, not a spouse’ s.
What Benson emphasizes more than most is the exit, designed before he implements the strategy. He’ ll spread the unwind over three to seven years, or, as part of his preferred route, add fresh cash after a liquidity event to pay down leverage without selling at a gain. When it’ s done well, this strategy converts the client’ s portfolio into a plain, lower-cost direct-indexing account, a permanent piece of the client’ s allocation.
Brachman’ s team directly manages about $ 1.4 billion for a couple of hundred households, capping its allocation to the taxaware strategy at 20 % to 30 % of non-retirement assets, even at the highest leverage tier. The team doesn’ t touch retirement accounts, since clients can’ t borrow against them.
Unsatisfied with those who offer off-the-shelf versions of the long-short strategy, his team built a custom version of its own, keeping collateral in the client’ s control and deliberately holding down how much was borrowed to extend the 100 % portfolio and dampen its volatility.“ We’ re buying this portfolio to provide tax losses, not generate leverage alpha for someone,” Brachman says.
Because the firm is conservative with how much leverage it uses, Washington Wealth Group didn’ t have a problem when Schwab and Fidelity recently tightened their borrowing rules. It also helps, he says, that the custodians are offering rebates to RIAs when their short sale proceeds generate interest, which means the investors don’ t bear the full weight of the borrowing costs. That makes the long-short strategy more economical, he says.
Pratt’ s firm has run long-short portfolios since before the
Custodians Build Guardrails
In August, four months after Charles Schwab said it was restricting advisors’ use of longshort strategies, the firm was hiring for a new post— the director of long / short separately managed accounts— to build a formal program with executive-level governance for this single product line.
That restriction, it seems, may be just a precursor to expanding the program, as long-short strategies were instrumental in driving Schwab’ s revenue up 21 % year over year in the second quarter, executives said on the July earnings call.
“ Bigger competitors were maybe not making this as available, which probably led to a little
bit of a surge,” Schwab’ s CEO Rick Wurster said of the need for guardrails.“ We’ re past that now and in more of a stable growth environment.”
He predicted long-short would keep gaining traction over the next decade.“ Being able to generate and harvest losses while still largely tracking an index is quite a powerful strategy.”
Schwab may have put limits on how much of a registered investment advisor’ s book can sit in tax-aware long-short strategies( and limited the leverage those strategies can carry … and raised account minimums). However, it was Fidelity that made the first move at the end of 2025, when it paused new longshort accounts outright( a few months before Schwab’ s April move).
In both cases, the adjustments were an institutional reaction to a product that grew too large, too quickly, sources say, to a point where some formal risk infrastructure was needed before anyone— the clients, custodians or advisors— got hurt.
Aside from Altruist, no other custodian agreed to an interview for this article. Interactive Brokers sent a general email on the topic, and Schwab, Fidelity and Pershing, the top three custodians in the long-short arena, either declined to comment or didn’ t respond at all.
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