05/21/2026
Leveraged Long/Short Tax Alpha Is a Hotel California
The hottest tax strategy on Wall Street may also be one of the hardest to escape.
The Spreadsheet That Ruins the Afternoon
Every time something becomes the hottest trade on Wall Street, someone, somewhere, sits down with a spreadsheet and works out the actual unit economics over time, and posts the spreadsheet on the internet, and ruins everybody's afternoon.
The person who did that here is Victor Haghani at Elm Wealth, whose paper “Tax Aware Long Short,” cited by Matt Levine in Money Stuff, which is how we know something is a big deal, concludes that the manager's fees over twenty years eat up roughly three-quarters of the capital gains tax the investor was trying to defer in the first place.
But the bigger problem is that after nearly two decades of harvest cycles, there are highly leveraged long positions that need to be unwound and deeply in-the-money shorts that have to be covered.
"The investor has, in the technical language of the literature, ossified," says Mike Allison, Strategist and Portfolio manager at Investment Research Partners and former Global Portfolio Manager and Director of Equity Strategy Implementation at Eaton Vance.
Unwinding the longs at that point triggers long-term capital gain at roughly 24 to 29 percent all in.
"Unwinding the shorts is worse," Allison says, "because Section 1233 says that closing a short sale is always taxed at short-term rates, which in a state like California means roughly 54 percent."
So now you have a portfolio you cannot unwind without writing that big check to the IRS you were hoping to avoid.
Tax-aware long/short funds are booming, but exiting these leveraged strategies may create major tax and liquidity challenges.
