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A guide to 130/30 loss harvesting

Author

Listed:
  • Lisa R. Goldberg

    (BlackRock, Inc.)

  • Taotao Cai

    (BlackRock, Inc.)

  • Ben Schneider

    (BlackRock, Inc.)

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.

Suggested Citation

  • Lisa R. Goldberg & Taotao Cai & Ben Schneider, 2024. "A guide to 130/30 loss harvesting," Journal of Asset Management, Palgrave Macmillan, vol. 25(5), pages 445-459, September.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:5:d:10.1057_s41260-024-00374-z
    DOI: 10.1057/s41260-024-00374-z
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    References listed on IDEAS

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