A guide to 130/30 loss harvesting

Lisa R. Goldberg (), Taotao Cai () and Ben Schneider ()
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Lisa R. Goldberg: BlackRock, Inc.
Taotao Cai: BlackRock, Inc.
Ben Schneider: BlackRock, Inc.

Journal of Asset Management, 2024, vol. 25, issue 5, No 2, 445-459

Abstract: Abstract We analyze the effect of leverage on tax-managed public equity strategies for different types of investors by running back-tests on hypothetical portfolios. We found the average 130/30 long/short portfolio funded with cash generates 2.7 times more capital losses than the average long-only portfolio over the first 10 years. For an investor with a sufficient supply of short- and long-term gains, these additional losses translate to average pre-liquidation tax alpha (“TA”) of 4.41% per year. Liquidation reduces TA by about half, while a lack of short-term capital gains to offset reduces TA by approximately 40%. In combination, those investor characteristics may render a long-only loss harvesting portfolio or a low-cost ETF more desirable than a long/short tax-managed equity portfolio after costs and fees are taken into consideration. Leverage can also be used to revitalize an ossified portfolio whose loss-generating capacity has diminished.

Keywords: Tax alpha; Tracking error; Leverage; Liquidation; Loss harvesting; Long-short (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-024-00374-z

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