By David A. Koch, CFP®, AIF®, CEPA®, CFA, Director of Portfolio Management/Senior Wealth Advisor, Halbert Hargrove
As the cost of living continues to increase and with (perhaps a more punishing) tax season in the rearview mirror, investors may be wondering what other strategies they can employ to keep more of their money working in the market.
Luckily, an emerging trend called long-short equity is growing in popularity for its ability to participate in market gains and, additionally, tax loss harvest along the way.
Read on to see if this investment strategy is right for you.
What Is Long-Short Equity and What Can it Accomplish for Investors?
Donald Rumsfeld once said, “…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”
With long-short equity investing, the unknown unknown is the market. We don’t know what the market is going to do. The known unknown is the alpha; the performance relative to the market indices. The goal is to add alpha, i.e., outperforming the market, but we know it isn’t achievable all the time. The known knowns with long-short equity – is the tax loss harvesting.
When you own 1000 stocks we’re pretty certain that they’re not all going to go up. By selling those that go down, called tax loss harvesting, you get to use those losses you book to offset capital gains taxes when you sell something profitable in the future.
Long-short equity buys stocks that are anticipated to be valuable in the long-run while simultaneously shorting stocks that are expected to decline in price. By definition, “long-short seeks to augment traditional long-only investing by taking advantage of profit opportunities from securities identified as both under-valued and overvalued.” By being “long-only,” you are limited to buying stocks that you like, but by adding a short component you are able to profit when stocks that you don’t like go down in price.
If it sounds complicated, it is. Although first introduced in the 1940’s, long-short equity investing has only more recently become available to more investors because of advances in trading technology. Keeping track of a 1000 stock portfolio is challenging alone, but when you realize that a 1000 stock portfolio has more than a half million pair-wise correlations among them, that really becomes something arduous to keep track of. This is where highly sophisticated trading technology comes into play.
The strategy seeks to allow investors to closely replicate market returns in a tax efficient manner. But it’s not suited for everyone.
Which Investors is Long-Short Equity Strategy Best Suited For?
Halbert Hargrove (HH) employs a long-short equity strategy for high-net-worth individuals and especially people who have large, concentrated stock positions. Investors who are looking to trim or liquidate appreciated assets in the future and want to mitigate capital gains taxes are also good candidates. To be clear, the money has to be taxable – IRAs, Roth IRAs, or 401(k)’s are not eligible – and there is a $1 million minimum investment to start.
Keep in mind, there are several ways to incorporate a long-short equity strategy. At HH, we are not doing long-short “market neutral” – which is a strategy designed not to move with the market. We employ a strategy that moves along with the market, for better or worse, within a range. If the market is up, we would expect to be up, but if the market is down, we would expect to be down as well.
Consult with a tax professional first, but what is amazing is that a long-short equity strategy may be able to offset the capital gains not only from the sale of investments in the portfolio, but potentially from the sale of outside real estate, or even the sale of a business. In fact, there are many circumstances in which running a long-short equity strategy can compliment business exit planning.
So, how can you get started with long-short equity?
Preparing to Implement Long-Short Equity
A long-short equity strategy is designed to provide cumulative tax benefits while maintaining exposure to the broad US stock market.
It’s important to note that this strategy is not cut out for amateur investors. That’s because the way HH implements long-short equity is through a quantitative overlay requiring the collective knowledge of a team of experts. This work is also done at the end of each month, not annually, in an effort to maximize the power of Intelligent Rebalancing®. In sum, it’s a lot of work! Indeed, a standard 1099 for an HH client employing long-short equity will detail thousands of trades over the course of a year.
If you are looking to invest more than $1 million, or planning to sell a piece of real estate or business soon, it’s time to get your financial advisor on the phone so you can effectively plan your strategy.
Interested in speaking to an advisor at Halbert Hargrove about incorporating long-short equity into your financial portfolio? Learn more about our services and how we can assist you with your financial goals by reaching out to us today.
Disclaimer:
The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. There can be no assurance that an investment strategy will be successful. The use of a long-short equity strategy generally involves additional risks beyond those associated with traditional long-only investment strategies. The reader is cautioned to understand the various risks associated with any investment strategy before making any investment decisions. This information should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The reader should conduct his or her own analysis and consult with professional advisors prior to making any investment decisions.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. There is no guarantee any forward-looking statement will come to pass. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index.
