COVER STORY tax angle existed. Burney sizes its leverage conservatively using a standard 130 % long, 30 % short structure( a 100 % long investment, plus a 30 % long investment made possible with cash from 30 % short sales). His typical clients, who have between $ 2 million and $ 5 million in assets, need an aggressive risk tolerance and the sophistication to understand a short position’ s unlimited loss potential before Pratt will consider them for a long-short tax strategy.
He points to a recent example of what happens when a longshort book isn’ t market-neutral: Leopold Aschenbrenner’ s AIfocused fund, Situational Awareness, fell from roughly $ 45 billion to $ 10 billion after its long AI-infrastructure bets and short bets on disruptable companies moved against each other under heavy leverage.
When done correctly, Pratt says, long-short requires that the manager match risk exposures on both sides for each stock position closely enough that broad market moves largely cancel out between them.“ That long-short section should truly be market neutral,” he says.
Jasmine Yu, chief investment officer of Bryn Mawr Trust Advisors headquartered in Philadelphia, favors an Invesco separately managed account that uses a 130 / 30 long-short
The Risks
A short position in a security can lose money without limits. Every advisor interviewed for this article pointed to this heart-stopping hazard, which simply doesn’ t exist with a long position— where a loss is capped at the amount invested. Layer on leverage in a genuine downturn, and a portfolio designed to track a benchmark like the S & P 500 can post a return of outsized losses, Fleissig warns. He cites the dot-com crash, the 2008 financial crisis and the pandemic experience in March 2020 as examples.
The costs of the tax-aware long-short strategy are also easy to underestimate. Manager fees run around 100 basis points of the borrowed“ extension,” and the custodian’ s net borrowing cost adds another 80 to 120 basis points, according to Kitces. com. So while a conservative 130 / 30 structure might cost roughly 60 basis points all in, an aggressive 300 / 200( where a base 100 % long investment is accompanied by another 200 % with short holdings) can run from 350 to 400 basis points.
And unwinding the strategy carries its own risk if markets move quickly. In a crunch, an investor may not know their real net exposure.“ You think you’ re net 100. All of a sudden, you’ re net 150. You just don’ t know,” Fleissig says.
The Benefits
Set against those risks, advisors describe real, differentiated benefits. Losses on the short side can offset gains elsewhere, freeing up space for attractive but tax-inefficient investments a client might otherwise avoid. Hillard points to hedge funds yielding 7 % to 8 % before tax: Paired with long-short losses, a client captures more of that return after tax without adding equity risk.
And Benson uses these separately managed accounts to slowly diversify a concentrated stock holding over years rather than try to branch out by making a single, painful sale.
But there’ s more to this than just getting people out of concentrated tech stock holdings, according to Smith. Any large gain that an investor has built up, whether it’ s in a pre-IPO grant or a home they’ ve owned for decades, fits the same mechanics.
Jasmine Yu, chief investment officer of Bryn Mawr Trust Advisors headquartered in Philadelphia, favors an Invesco separately managed account that uses a 130 / 30 long-short leverage structure. She says it“ stands out for its strong performance and client outcomes.”
leverage structure. She says it“ stands out for its strong performance and client outcomes.”
By limiting leverage with the 130 / 30 approach, clients avoid excessive risk taking, which Yu considers prudent.“ While the tax benefits can be meaningful for the right investor, the underlying investment results [ for most funds ] have generally not been exceptional,” she adds.
For families with no near-term need for the money, several advisors described the real value of the strategy as something that allows their portfolio to compound for decades until they die, before the position is unwound in a basis step-up and the tax bill is effectively erased.“ It’ s its own little machine,” as Brachman puts it, one not built for the year it’ s opened but for the year it’ s finally allowed to end.
It’ s also, by Cerulli’ s account, a business that custodians are building systems to avoid being hurt by.“ They’ re building the limitations, and whatever else, so that their business isn’ t at risk,” Smith says, as the appetite for long-short will only increase until it is met by some equal, opposing force.
The young, fast-growing custodian Altruist, for example, has been taking its time to enter the market in a way that makes sense for it. In June, the firm announced it would offer in-house margin loans and options trading beginning in September.
“ We’ re still developing this, but of course there’ s going to be very vigilant risk monitoring and management around these types of strategies, including margin levels,” Grealish says.“ We have a margin and lending team that is looking after the health of accounts, and we will continue to build up those processes to support a long-short strategy.”
40 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER / OCTOBER 2026 WWW. FA-MAG. COM