How it works:
In this example, let's say our client has $1 million and wants to track the S&P 500 while also harvesting tax losses.
We help them invest the $1 million into a basket of 200 to 300 stocks expected to match the index’s performance.
Their portfolio keeps the winning securities and sells those that have declined below the purchase price, replacing them with a close alternative.
So, let’s say for example Visa was one of the stocks that declined since our client bought it. We’d sell it and harvest the losses.
Then we would replace it with a stock like MasterCard.
Our goal is to harvest losses on decliners to offset capital gains from other investments, while buying new stocks to keep tracking the index.
How it works for a large liquidity event:
To accelerate these losses, we would invest the same $1 million in a basket of stocks, but also borrow against the investment to create two “extensions” — longs that bet on the stocks and shorts that bet against them.
For example, in a 140-40 portfolio, our client’s portfolio would be going long and short by an additional $400k, respectively. The investment is now 140% long and 40% short, which can amplify returns while providing more opportunities for tax losses to harvest.
Our client’s net exposure would still be $1 million, or 100% net long.
This amplifies both the losses and the gains relative to our client’s overall position. It also generates losses on the shorts that go up in addition to the longs that go down, so there is greater potential for losses to harvest.
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