What if the financial tools you’ve been taught to fear—like leverage, short selling, and active trading—aren’t inherently dangerous… and might actually decrease your tax bill?
What if it isn’t the tool that determines the risk, but how it’s used and who is using it?
A sharp knife in the hands of a skilled chef isn’t dangerous—it’s essential. Precision tools, when used intentionally, allow for control, consistency, and high-quality results. It’s the dull knives, used without care, that tend to cause accidents. The same principle applies to power tools. You wouldn’t hand one to a toddler, but would you want your home built without them? Probably not.
That’s how we think about certain financial tools—like leverage, short selling, and active trading. Misused or misunderstood, they can introduce unnecessary risk without corollary benefit. (We’ve spoken ad nauseum about hedge funds, private equity, venture capital, and other Alternative Investments for High Net Worth Investors.) But when applied for a specific purpose, like generating consistent tax advantages, they become powerful pieces of a carefully prepared investment strategy.
In investing, just like cooking or construction, risk isn’t always about the tool itself—it’s about the design, the intent, and the safeguards that surround how that tool is used.
At Hendershott Wealth, we’ve developed a sophisticated suite of strategies that fall under our Ultra Tax Efficient Wealth Management℠ (UTEWM℠) offer. Within this suite is a strategy referred to as tax-aware long-short.
What is tax-aware long-short investing?
Tax-aware long-short is an advanced, research-backed investment strategy that can significantly reduce what you owe in capital gains taxes.
For the right investor, the long-term result of implementing tax-aware long-short in their portfolio could equate to 30-50% more wealth than a comparable strategy that doesn’t generate the same tax advantages.
And, the tax-aware long-short strategy—powered by AQR Capital Management through its Flex SMA product—makes use of sophisticated investment tactics that many investors have been conditioned to be wary of because we’ve all seen them used in high-risk, speculative, and costly ways.
But again, intent matters, and in this case, the strategy’s primary intent in using those tactics is to deliver tax alpha: extra wealth created by smart tax management. Same tactics; very different intention.
With a clear framework and disciplined risk controls, these tools we’ve all seen misused can be deployed conservatively to reduce taxes, manage risk, and grow your wealth faster.
What makes the tax-aware long-short strategy different from the kind of high-stakes investing that demonizes leverage, short-selling, and active trading?
It comes down to two things: structure and intent.
Tax-aware long-short uses market-neutral leverage designed to produce tax losses, not portfolio losses. This is different from using leverage (or active trading) to chase returns, which often comes with higher risk and amplified downside exposure.
(Keep reading to learn more about what we mean by “market-neutral leverage” and how it works in this strategy.)
The goal of tax-aware long-short is to generate those tax losses in both positive and negative market environments without adding market risk. Every component of the tax-aware long-short strategy—from how trades are paired, to how risk is hedged, to how the strategy is monitored—is engineered for balance, consistency, and maximized tax efficiency…whether the market is up or down.
As fiduciary financial planners, our commitment is clear: we act in the best interests of our clients—always.
What outcomes can I expect from tax-aware long-short?
After extensive due diligence, proprietary research, and careful evaluation of how this strategy performs across different market conditions, we’ve come to the following conclusions:
- The tax-aware long-short strategy is appropriately designed to deliver market-like returns while generating consistent meaningful tax benefits,
- The associated risks added by using short selling, leverage, and active management are both manageable and acceptable, and
- For suitable investors, in most cases, tax-aware long-short is the most powerful tool you can take advantage of for minimizing capital gains taxes and continuing to build your wealth without sending large amounts of it to the government.
In fact, the practical application of tax-aware long-short is what we’ve hypothetically seen allow for:
- An investor with a $12M concentrated stock portfolio to diversify their holdings in just two years–without the $4m tax bill,
- A retired couple to save $1.6m in taxes during retirement and direct that money to their kids rather than the IRS, and
- A 38-year old startup employee to take her $9M IPO windfall, defer capital gains taxes on it, and turn it into $20M by age 65.
Throughout the remainder of this article, we’ll explain how these key tactics work within the tax-aware long-short strategy, and why we’re actively recommending this approach to select clients when the fit is right.
You’ll learn what the tools are, why they’re used, and how they come together in the most powerful strategy in our Ultra Tax Efficient Wealth ManagementSM offer–a suite of services that significantly reduces tax drag, manages risk, and helps our clients keep more of what they earn.
Defining the tactics in tax-aware long-short: What is short selling, active trading, and leverage?
Let’s start by defining the terms that describe the tools we’re working with so we’re on the same page, starting with…
What is short selling?
Short selling is selling something you don’t currently own, which means you eventually need to return the asset to the original owner. Often a short sale is initiated with the intention of buying it back later at a lower price.
Here’s how it works, in four simplified steps:
- Borrowing something–a commodity or an asset–from someone,
- Selling that commodity or asset to someone else at today’s price,
- Later, buying the commodity or asset at its current price (from anyone), then
- Giving it back to the original person or entity that lent it, thereby repaying the loan.
If the price of the commodity or asset drops between Step #1 and Step #4, the borrower repurchases at a lower cost and keeps the difference as profit.
Of course, that lower price isn’t a guarantee, which makes short selling a gamble.
Think of it like this: Your friend lends you a limited-edition designer handbag that’s currently selling for $1,000. You sell it for that price, then a few weeks later the price drops to $800. You buy it back at the lower price and return it to your friend, which means you just made $200 on the transaction.
That’s short selling. If the price had gone up between Step #1 and Step #4 instead, you’d have to pay more to replace the bag, resulting in a loss.
Short selling with intention: Tax-loss harvesting without exposure, to reduce your tax bill
In a professionally managed, diversified strategy like the customized ones we build using Flex SMA within UTEWMSM, short selling is used with stocks in small, balanced positions as part of a market-neutral design that enables systematic tax-loss harvesting without increasing overall market exposure.
In other words, because short positions tend to lose money over time (by design, because the stock market tends to go up over time), we use short selling in the tax-aware long-short strategy to create the real tax alpha magic: those “losers” generate large, consistent tax losses that we can harvest and use to reduce your tax bill.
That’s market-neutral leverage: The losing short sales are offset by extra gains on the balancing long positions. With balanced long and short positions, you always have tax losses to harvest without having overall losses.
The tax losses created by the short sales only serve to cancel out these extra capital gains. They do not create portfolio losses, and they’re not just a “silver lining” to market losses. In this case, they’re a hands-down win.
And if the market is down? They cancel out the actual losses from the extra long positions, leaving you with valuable tax losses whatever direction the market takes. All while leaving your investment returns intact.
Tax-loss harvesting is a fundamental tax efficiency tool where you–or your financial advisor–sell stocks that have declined in value in order to “capture” or “harvest” losses. These losses are then used to cancel out current or future capital gains on a dollar-for-dollar basis.
Stocks declining in value is bad for long-term wealth growth, but tax-loss harvesting is the silver lining of that gray cloud.
Tax-aware long-short is designed to provide greater, more reliable tax-loss harvesting opportunities–effectively providing a silver lining without so much as a gray cloud.
Why amateur investors feel uncomfortable with short selling
Just as investors can profit when an asset increases in value, short selling allows investors to benefit when an asset declines in value.
It’s a legitimate, widely used investment tactic that can be used thoughtfully and deliberately in professional strategies to manage risk, increase flexibility, and–in the case of tax-aware long-short strategies–harvest tax losses that reduce capital gains.
But for many investors, short selling comes with baggage. It’s often misunderstood or portrayed in a negative light—especially in media narratives about crashes, hedge funds, or economic turmoil. There are a few reasons for that:
- Short selling feels counterintuitive. Selling something you don’t own—and profiting when it loses value—runs against the grain of how most people think about investing.
- It triggers emotional discomfort. Short selling is sometimes perceived as “betting against” people, companies, or progress itself.
- It’s been villainized. From The Big Short—which portrayed hedge fund managers betting against, and therefore profiting from, the 2008 housing crisis—to the GameStop saga—where retail traders squeezed hedge funds who were short selling the company stock by driving the price up, and cost those hedge funds quite a bit of money, Hollywood and the headlines have painted short sellers as the bad guys who profit while others suffer.
- It’s been abused. In rare cases, immoral traders have used short selling tactics to manipulate small or vulnerable companies, feeding the idea that shorting is predatory.
But just like any tool, short selling isn’t inherently beneficial or harmful—it depends on how it’s used. In the next section of this article, you’re going to see exactly how it’s used to neutralize risk in a market-neutral portfolio.
Shorting is risky for your financial security as a solo strategy where you’re banking on your prediction (that the price will drop) being correct. However, within a rules-based framework like Flex SMA’s tax-aware long-short strategy, short selling is used thoughtfully and with guardrails to manage risk, generate tax benefits, and serve your best interests.
Now that we’ve unpacked short selling, let’s talk about another tactic that has a bad rap (for good reason): active trading.
What is active trading?
Active trading, or active management, is a term for the myriad activities that serve to help people identify stocks before they go up in price.
I’ve expounded upon active trading’s bad rap before, namely in episode 248 of the Love, your Money® Podcast where I shared the Worst Financial Advice on the Internet, and our friend “Beat the Market Brad” ranked #1. The gist of what I’ve shared is this:
Anytime you hear someone talking about things like stock picking, market timing, trading options, or technical or fundamental analysis, you can run.
With active investing, you’re constantly trying to predict what will go up before it does and buy those stocks or those companies. Keep in mind: The stock market is a vast, vast entity. Our clients own 12,000 publicly-traded stocks. Can you be an expert on all of them? I promise you, my team doesn’t know every detail of those 12,000 companies. But you need to own most of them to be properly diversified.
Not only is the stock market vast–it’s quickly changing based on economic trends, market trends, demand trends, and more. Every single minute, there are very smart people trying to outpace you in your trades. And if you ask 100 people whether human beings can predict the future, 99 of them will say no. But if you ask 100 people whether someone can predict the stock market, in our experience, 99 of them will, for some strange reason, say yes.
What makes active trading lower risk in the tax-aware long-short strategy?
Most active trading strategies chase returns–a high-stakes game that very few extremely experienced investors succeed at. However, with tax-aware long-short, active trading is used to harvest tax losses, not time the market.
But before I explain that, let’s define another tactic that often raises eyebrows: leverage. Like short selling and active trading, leverage isn’t inherently risky—but it’s often misunderstood.
What is leverage?
Leverage means using borrowed money to increase your potential impact—whether that’s impact in building, investing, or purchasing. It’s a tool we’re all more familiar with than we might think.
For example, if you’ve ever taken out a mortgage, you’ve used leverage:
A $200,000 down payment on a $1 million home uses 4x leverage, meaning you’ve invested $200,000 of your own money and borrowed the remaining $800,000. If the home goes up in value, you benefit not just from the growth on your original $200,000, but on the full $1 million asset. If the value declines, the loss applies to the full $1 million as well.
A 10% decline on a $1 million asset is $100,000, but $100,000 is half of your original $200,000–and most of us don’t think twice about taking out an 80% mortgage. That’s leverage—it magnifies both gains and losses.
In the investment world, leverage works similarly. Investors can borrow from a custodian (e.g. Fidelity or Schwab) using their existing portfolio as collateral. That borrowed capital can then be used to purchase additional securities.
It’s well understood that leverage introduces risk, but the potential danger comes from the way it’s used. Too much leverage can be a problem, and using leverage to increase exposure in concentrated ways can also create problems because it doubles down on both returns and risk.
Consider two major financial failures and their use of aggressive or high risk leverage:
Lehman Brothers failed in September 2008, ushering in a financial crisis and severe recession. Lehman had borrowed over $32 for each of the firm’s own dollars and used this leverage to rapidly expand high-yield, high-risk bets on real estate securitization. When real estate markets tumbled, Lehman’s equity vanished, and lenders lost over $300 billion.
Silicon Valley Bank’s (SVB) March 2023 failure was smaller but also painful, triggering a brief regional banking crisis. The bank had borrowed over $12 for each of the bank’s own dollars and used this leverage to more than triple its assets in a little over two years. When interest rates rose sharply, SVB’s equity vanished, and the bank shut down, costing the FDIC (and therefore American taxpayers) almost $20 billion.
We can all agree that these are situations best avoided.
How tax-aware long-short investing uses leverage responsibly
With a tax-aware long-short investing strategy, we keep unnecessary risk effectively constrained by limiting borrowing to between $0.5 and $2 for each of the client’s own dollars–which is half the mortgage leverage example above.
Neither Lehman nor SVB would have failed if they had borrowed at these more intentional levels.
When you hear “leverage”, it’s easy to picture high-stakes gambling–and in the cases of Lehman Brothers and SVB, that’s exactly what was happening: they both borrowed to amplify existing directional market bets.
Again, the intent matters: leverage doesn’t automatically make something risky—it depends on how much is borrowed, how it’s used, and how the portfolio is structured to manage the potential downsides.
In the case of the tax-aware long-short strategy, leverage increases market exposure (as it always does), but what’s different is the short positions mitigate that increased exposure.
Instead of borrowing to increase a directional bet, market-neutral strategies use leverage to create balance.
By design, this kind of leverage doesn’t amplify market risk—it helps neutralize it. Let’s look at how.
If you’re looking for your next series to watch, look no further: I recorded a 7-video series walking through how market-neutral leverage can reduce tax drag without adding market risk–and how it’s used in tax-aware long-short to minimize what you owe in capital gains taxes and keep more of your hard-earned wealth working toward your goals, not Uncle Sam’s. Watch Video 1 here!
Market-neutral leverage: How low-risk leverage can be intentionally used for high impact in tax strategy
In a tax-aware long-short strategy, leverage is used to simultaneously own stocks (long positions) and short stocks in equal measure, making it market neutral. The goal isn’t to outperform the market—it’s to use overlays to remove market directionality as a factor, creating a stable platform for that systematic tax-loss harvesting we talked about.
What is leverage?
Market neutral means you’re not using that leverage to bet on whether the market goes up or down—you’ve removed that exposure entirely.
In the tax-aware long-short strategy we’re describing here, your core portfolio is used as collateral to borrow stocks. Then the account manager opens two sets of positions in a separately managed account:
- Long positions that benefit if stocks go up
- Short positions that benefit if stocks go down
Because you’re long and short in roughly equal amounts, the market risk cancels out–and that’s the key: leverage is primarily used here to generate tax outcomes, not to chase performance.
That’s what makes it market-neutral: your portfolio doesn’t become more sensitive to market swings.
Instead, it generates activity and losses that can be used to lower your tax bill—without changing your overall market exposure or resulting in “real world” losses. You really can have profits from your investments with losses only on your tax return.
Let’s break market-neutral leverage down even further into its components, first looking at the “long” part of the long-short strategy.
What is a long overlay?
The long overlay in a tax-aware long-short strategy looks and feels a lot like a traditional investment portfolio. When you “hold a stock long,” you own it and earn returns when the market goes up.
In a long overlay, you use your core portfolio as collateral to borrow money from a custodian—like Fidelity or Schwab—and buy even more of those stocks.
That increases the size of your portfolio, and with it, your exposure to market gains and losses.
When the market goes up, the long overlay rises with it–in fact, it’s designed to slightly outperform the broad market, and you, the investor, reap profits which remain unrealized.
When the market goes down, the long overlay falls in value. Here, the losses are harvested to provide tax benefits without affecting the core portfolio.
It’s like doubling down on your investment, and it’s probably sounding a lot like that high-risk leverage we warned you against above—but in this case, you’re doubling down on the upside and simultaneously neutralizing the new, added risk.
You neutralize the additional risk with the short overlay, which cancels out the extra risk from those new, borrowed, long positions. Let’s look at how.
What is a short overlay?
Along with the long overlay, the manager borrows stocks and engages in short selling. That means they “short the stocks” by selling them and eventually buying them back later.
If the price drops between the sale and buy back, the difference is profit—profit that offsets losses in the long overlay when the market goes down.
However, as mentioned before, because short positions tend to lose money over time (by design, because the stock market tends to go up over time), that’s where we experience real tax alpha magic, where those “losers” generate large, consistent tax losses that we can harvest and use to reduce your tax bill… without reducing your overall return.
So, we’re systematically shorting to keep those long positions we bought with borrowed money from adding market risk to your portfolio.
This is how we can intentionally create tax losses even when markets are up.
So now you’ve got your core portfolio, along with an overlay consisting of:
- Long positions that profit when the market rises and produce harvestable losses when the market falls, and
- Short positions that profit when the market falls and produce large, consistent, tax losses to reduce your tax bill when the market rises.
This combination is what’s called a market-neutral, long-short overlay.
Even though we’re borrowing to make these purchases, the positions are systematic, diversified, and balanced—we’re not making big bets trying to outguess or time the market.
But in any market-neutral investment, you are making a small bet: that the long positions outperform the short positions. That small bet is the opportunity and the risk. If they do, your portfolio makes a little more money.
Of course, in a diversified portfolio including hundreds–if not thousands–of stocks, this is a small bet with small risk.
The goal here is to add small, steady returns to your core investments–all while getting significant tax benefits.
And no matter what happens in the market, this overlay gives you tax losses without comparable portfolio losses.
Leverage vs. market-neutral leverage, illustrated
The graphic below illustrates the hypothetical difference between straight leverage (when an investor or strategy borrows money to buy more of the same assets they already hold–usually long positions–in hopes of amplifying returns) and market-neutral leverage (when an investor uses borrowed money to increase the size of both long and short positions that does not raise market exposure or risk).
Again, we know “leverage” and “short selling” sound risky. And in many contexts—they are. But here’s why the use of them in this tax-aware long-short strategy is different:
- It’s market neutral, so we’re not betting on where the market is headed,
- It’s rules-based, so trades are driven by data, not guesses or emotion,
- It’s highly diversified, with hundreds (sometimes thousands) of positions across sectors, and
- It’s monitored and managed, with ongoing oversight from investment managers
When done thoughtfully, the long and short positions balance each other out. Your leverage isn’t funding bets that the market will go up or down—instead, it’s positioned to be market neutral and provide tax benefits in either case.
You’re using leverage, yes, but you’re not amplifying market movements. Instead, you’re creating conditions that allow the portfolio to grow with the market while harvesting significant losses for tax purposes along the way—and all without adding unnecessary risk or volatility.
Again, this is called market-neutral leverage, and it’s a key component of Flex SMA’s tax-aware long-short strategy we offer in our Ultra Tax Efficient Wealth Management℠ suite of services.
How does active trading fit into the tax-aware long-short strategy?
Again, while most active trading strategies chase returns, with tax-aware long-short, active trading is used to harvest tax losses, not time the market.
And while yes, it involves regular trading, the strategy is not solely focused on outperformance (aka “beating the market”). It’s engineering portfolios to:
- Create opportunities to harvest losses that lower your tax bill,
- Not sacrifice liquidity or add market risk, and
- Leave your core investment strategy—and the returns it produces–fully intact
There’s no huge market bets—only the strategic production of tax alpha: higher net returns that don’t come from investment performance, but from smart tax strategy.
Together the long and short overlays we described above create tax losses, whether the market is up or down, without generating portfolio losses because one is always doing well and the other is not. This is your tax alpha.
The magic isn’t in trying to win big on either side. It’s working with the naturally occurring ups and downs of the market, creating consistent, tax-advantaged losses across the long and short positions while keeping your investment exposure stable.
Again—it’s not guessing. It’s strategic management, where:
- The system identifies hundreds of long and short stock positions
- Trades are executed regularly, based on rules—not opinions or speculation
- It’s fully diversified, so no single position can sink the strategy
- And it’s market neutral, meaning your total risk exposure stays the same
Even when markets are up, the strategy finds opportunities to realize losses from the short overlay, which offset taxable gains in your core portfolio. When markets are down, losses are harvested from that long overlay.
That’s what makes this so effective in achieving tax alpha: You keep your market returns—and sometimes even net higher ones—but reduce your tax burden.
If taxes are your biggest lifetime expense (hint: they most likely are), ignoring tax-aware investing is expensive. Learn how tax-aware long-short is designed to create tax losses without portfolio losses—and see leverage in action in the context of farming, cooking, and driving–in our 7-video series. Start with Video 1 →
The Results of Tax-Aware Long-Short: A Balanced, Tax-Efficient Approach to Long-Term Wealth
The tax-aware long-short strategy we’re offering through AQR’s Flex SMA isn’t something we stumbled into. As fiduciaries, we’re legally and ethically obligated to act in your best interest and we always do our due diligence–in this case, months of it.
Before adding the Flex SMA tax-aware long-short strategy to our Ultra Tax Efficient Wealth Management℠ suite, our team went heads-down in due diligence mode, including:
- A thorough vetting of the custodian (Fidelity, and probably Charles Schwab in the near term future) and investment manager (AQR Capital Management),
- Evaluating the strategy’s track record,
- Independently confirming the strategy’s efficacy,
- Quantifying the strategy’s risk,
- Verifying account holders’ access to their capital
- And, most importantly, affirming that it will help real people like you reduce their tax bill without sacrificing performance or increasing risk.
And again, in doing our independent and thorough due diligence, we discovered that implementing a tax-aware long-short strategy is what hypothetically:
→ Makes it possible for an investor with a $12M concentrated stock portfolio to diversify their holdings in just two years–without the $4m tax bill.
→ Allows a retired couple to save $1.6m in taxes during retirement and direct that money to their kids rather than the IRS.
→ Empowers a 38-year old startup employee to take her $9M IPO windfall, defer capital gains taxes on it, and turn it into $20M by age 65…
And, more generally, is what allows you to keep your options open, stay flexible in uncertain markets, and confidently say yes to the life you’re working so hard to create.
The conclusion? This strategy isn’t for everyone. But for suitable clients—those with $1.25 million or more in taxable assets (AQR’s minimum)—this strategy makes a meaningful, measurable difference over time, potentially increasing your lifetime wealth by 30-50%.
And it’s aligned with the same evidence-based, long-term approach we’ve always believed in.
Tax-aware long-short: Mitigating risk, decreasing your tax bill, and growing your wealth–faster
We’ve truly never seen a strategy that’s able to produce tax alpha like tax-aware long-short–and it does it in both the long and short overlay, no matter which way the market moves.
Let’s review the strategy one more time:
With tax-aware long-short working for you, when the stock market goes UP in value:
- The long overlay rises with the market (it’s actually designed to slightly outperform the broad market)–and you, the investor, reap profits which remain unrealized.
- When the shorted stocks rise in value, the short overlay produces losses which roughly offset the gains in the long overlay. These losses are realized, creating tax benefits without portfolio losses.
And when the stock market goes DOWN in value:
- The short overlay produces value and you, the investor, reap profits, which are largely deferred.
- The long overlay falls in value and these losses are harvested to provide tax benefits–again, without portfolio losses.
This is all facilitated by an account manager in a separately managed account. In our case, we offer the tax-aware long-short strategy through AQR Capital Management’s Flex SMA. This isn’t a strategy you should try to implement on your own.
And while yes, this strategy uses tactics traditionally thought of as risky–like short selling, leverage, and active trading–it comes down to intent. With tax-aware long-short, each of these tactics is used in a conservative way that actively mitigates risk, increases your tax efficiency, and grows your wealth… faster.
At Hendershott Wealth Management, our goal is simple: to help you keep more of your money, and use it in ways that matter–because we want you to thrive.
You’ve built your wealth with intention. Let’s manage it that way, too.
Over the past 25 years, we’ve seen how fear of taxes quietly drives financial decisions–and we’d never encountered a truly effective, long-term tax mitigation strategy until recently, with Flex SMA.
What we had seen was people contorting their lives around avoiding paying capital gains taxes–at the cost of their quality of life.
We’ve watched people accumulate $10-20 million appreciated stock portfolios, delay succession plans in business, or hold onto property they no longer want, only to feel stuck.
They don’t want to sell, even if it’s the best move for their life, because they’re terrified of the tax bill.
They end up with no clear exit plan, and miss out on the freedom their wealth should provide.
That’s not tax strategy, that’s tax avoidance–and it has always felt out of alignment to us. If you’re going to have a $20 million portfolio, you should be living like royalty.
The good news is: there’s a way forward that doesn’t require compromise.
With the right strategy and team beside you to implement it, your money can support your vision—on your terms, in alignment with your values, and with room to thrive.
If you’re ready to see how the strategies inside our Ultra Tax Efficient Wealth Management℠ suite of services can help you keep more of what you earn–and whether the Flex SMA long-short strategy belongs in your wealth plan–head to
hendershottwealth.com/contact.
You’ll get paired with one of our lead advisors for a complimentary 45-minute Discover Call.
We’ll take a look at your financial picture, help you assess your current tax drag, and figure out if implementing a tax-aware long-short strategy is a smart next step for you.
If it’s not, we’ll point you in the right direction. But if it is—it could make a seven- or even eight-figure difference over your lifetime.
Either way, you’ll walk away from our call with clarity, insight, and a better understanding of how to make your wealth work harder—and smarter—for you.
[Let’s start the conversation]
Frequently Asked Questions
How can high-net-worth investors mitigate the impact of capital gains taxes?
Hendershott Wealth Management offers a suite of services we refer to as Ultra Tax Efficient Wealth Management℠. This approach includes tax-aware investing strategies such as direct indexing and long-short overlays that may help high-net-worth clients reduce capital gains taxes without sacrificing long-term growth potential.
What is a tax-aware long-short strategy?
A tax-aware long-short overlay strategy is an investment approach that uses balanced long and short positions to neutralize market exposure while aiming to systematically realize capital losses that can be used to offset gains and reduce overall tax liability.
Is the tax-aware long-short strategy risky?
Like all investment strategies, it carries risk–but not in the way many investors assume. While it uses tactics like leverage, short selling, and active trading, the strategy is designed to be market-neutral; that means your exposure to market swings doesn’t increase. These tools are used conservatively, with rules-based oversight, and the goal is improving tax efficiency—not pursuing speculative gains.
What is tax loss harvesting?
Tax loss harvesting (TLH) is when investors reduce their current taxes by deliberately selling investments that have dropped in value. These realized losses automatically offset any taxable capital gains realized in the same tax year. If total capital losses for the year exceed total capital gains, the excess loss can offset up to $3,000 of ordinary income ($1,500 if married filing separately), with any remaining losses carried forward indefinitely into future tax years.
What is tax alpha?
Tax alpha is the incremental after-tax investment return generated by effective tax management. It reflects the value created by reducing, deferring, or offsetting taxes in ways that increase after-tax wealth.
What is investment alpha?
Investment alpha is the incremental before-tax performance generated by a savvy investment strategy. It comes from selecting securities and/or timing the market, whereas tax alpha comes from skill at structuring portfolios and transactions to minimize tax drag.
What is investment alpha?
Alpha losses are used to create tax alpha because they’re recognized as losses by the IRS, so you get tax deductions without lowering your portfolio’s value. Managed correctly, alpha losses turn market bumps into tax perks; it’s like converting lemons into lemonade, and writing off the lemons on your tax return.
What’s the minimum investment to access the tax-aware long-short strategy?
The Flex SMA tax-aware long-short strategy offered through AQR Capital Management requires a minimum of $1.25 million in taxable assets. Other tax-efficient services within our Ultra Tax Efficient Wealth Management℠ suite are available to all Hendershott Wealth clients.
How do the tax benefits actually work?
This strategy is designed to systematically generate realized tax losses—even in rising markets. These losses can potentially offset current or future capital gains, which may reduce your tax bill and help keep more of your returns working for you.
What are the borrowing costs in a long-short tax-aware strategy?
While borrowing on margin in traditional settings can be costly (rates often range from 5.75% to 10.5%), the net borrowing cost for this strategy is currently much lower—estimated at about 0.6% as of July 2025. Because this strategy is considered market neutral and lower-risk, custodians may offer more favorable financing terms.
What makes this different from hedge fund-style investing?
Unlike speculative hedge fund strategies, this approach isn’t designed to “beat the market.” Instead, it’s engineered to match or slightly exceed market returns while focusing on systematically harvesting tax losses. It’s rules-based, diversified, and professionally managed—with an emphasis on tax efficiency and risk management.
Can this strategy help me diversify concentrated stock without a huge tax bill?
It may. For suitable clients with large, appreciated stock positions, this strategy can help generate offsetting losses that may reduce the tax impact of diversification–without needing complex trusts, low return investments that lock up your money, or donor-advised funds.
Who manages this strategy?
The tax-aware long-short overlay is managed by AQR Capital Management, a leading institutional asset manager. With our Ultra Tax Efficient Wealth ManagementSM services, Hendershott Wealth ensures the strategy is integrated into your overall plan and aligned with your goals and values.
What kind of results can I expect?
While results vary, modeling shows suitable investors have the potential to see 30–50% more after-tax wealth over time compared to portfolios without this strategy. In real client portfolios, we’ve seen it help avoid multi-million-dollar tax bills while supporting long-term growth.
Is this strategy regulated or independently reviewed?
Yes. The strategy runs inside a Separately Managed Account (SMA) at major custodians like Fidelity, and is managed by a registered investment advisor (AQR). You retain full ownership of, access to, and visibility into your investments.
How does this fit into my overall financial plan?
We only recommend this strategy if it aligns with your broader goals and tax situation. It’s one piece of a fully personalized plan designed to support your wealth, legacy, and lifestyle—without compromise.
How can I find out if tax-aware long-short or the other strategies in Ultra Tax Efficient Wealth Management℠ are right for me?
Start by scheduling a complimentary Discovery Call at hendershottwealth.com/contact. We’ll walk through your financial picture and determine whether this strategy—or another from our UTEWM℠ suite—is the best fit for your needs.
Disclaimer
All investing involves risk, including the potential loss of principal, and there is no guarantee that any investment plan or strategy will be successful.
Advisory services are provided by Hendershott Wealth Management, LLC (“HWM”), an investment advisor registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
Content discussed is for information purposes only and does not constitute an offer, or solicitation of an offer, or any advice, or recommendation to purchase any securities or other financial instruments–and may not be construed as such.
All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation–and all examples are hypothetical, not reflective of actual executed transactions or client experiences.
The realized tax benefits associated with tax-aware strategies may be less than expected or may not materialize due to the economic performance of the strategy, an investor’s particular circumstances, prospective or retroactive change in applicable tax law, and/or a successful challenge by the IRS. In the case of an IRS challenge, penalties may apply. The discussed tax-aware strategies have additional costs that will increase investors’ expenses and as a result will reduce returns.
There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate.
When trading these instruments, one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives and using leverage. All funds committed to such a trading strategy should be purely risk capital.
Investment minimums apply. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.
All content originates with the Hendershott Wealth Management team. AI software was used to support clarity and tone during editing. Final content was written and reviewed by the Hendershott Wealth Management team for accuracy.
