Tax-aware investing has become one of the fastest growing areas in wealth management. Current estimates show that tax-managed solutions across all vehicles have grown to nearly $900 billion in assets, with long/short separately managed accounts alone surpassing $150 billion[i]. For high-net-worth clients with large capital gains from a business sale, a concentrated stock position, or appreciated real estate, the ability to defer and ultimately eliminate those gains through disciplined portfolio management is one of the most consequential planning tools available.
The core mechanics are well understood: harvest losses from underperforming positions to offset realized gains, hold winners so they compound untaxed, and plan for a step-up in basis at death that wipes the deferred liability entirely. Layer in leverage and the strategy becomes significantly more powerful.
What’s less discussed is the role of long/short strategies in this equation and why we think the ETF wrapper deserves a place in the conversation.
Why a long/short strategy can be tax efficient
A long-only portfolio generally generates losses only when some of its holdings decline. Direct indexing is the most common tax-aware approach, but research shows that harvestable losses tend to plateau around 30% of invested capital as the pool of loss-generating positions shrinks over time1.
A long/short portfolio overcomes that ceiling. It generates losses from two sources: the long positions that fall and the short positions that rise. That doubles the surface area for tax-loss harvesting without changing the portfolio’s net market exposure. AQR’s research has found that tax-aware long/short strategies can realize cumulative net capital losses exceeding 100% of invested capital within the first three years and that the primary driver of tax benefit is actually gain deferral, not just loss harvesting[ii].
Short positions also generate deductible borrowing costs as margin interest that can offset gains elsewhere in the portfolio. Because the short book is actively managed, losses can be harvested more frequently and systematically than in a long-only structure.
For a client sitting on a $1 million capital gain, the difference between a direct indexing approach and a long/short approach to tax-aware investing isn’t marginal. It may be the difference between partially offsetting the gain over several years and substantially offsetting it potentially in year one.
The custodian bottleneck
Here’s where the conversation gets timely. Custodians have started limiting registered investment advisor (“RIA”) access to long/short separately managed accounts (“SMAs”) through new platform caps, higher account minimums, and increased financing rates. The infrastructure that supports tax-aware long/short SMAs is tightening precisely when demand is growing. iCapital April 2026 research notes that the $100 billion in long/short SMA assets translates to several hundred billion in aggregate market exposure when leverage is factored in1.
This creates a structural question for advisors and allocators: if custodian capacity becomes a constraint on separately managed accounts, where does long/short demand go?
Why the ETF wrapper matters1
ETFs and SMAs are investment vehicles with different risks and characteristics. With an ETF, you lose account customization and direct tax lot management, but an ETF brings its own structural tax advantages that may be often underappreciated.
A peer reviewed study in the Review of Financial Studies (October 2025) found that ETFs’ structural tax efficiency, driven by in-kind redemptions under Section 852(b)(6) adds approximately 1.05% per year in after-tax returns compared to equivalent mutual fund structures[iii]. And according to State Street Global Advisors, only 7% of ETFs paid a capital gain distribution in 2025, compared to 52% of mutual funds[iv].
Beyond the tax wrapper, an ETF may solve the capacity problem. There are no platform caps, no minimum account sizes for margin, and no custodian balance sheet constraints. A long/short ETF that runs an actively managed short book alongside a concentrated long portfolio can potentially deliver the core tax-efficiency advantages of the strategy, dual-source loss generation, deductible borrowing costs, and disciplined risk management through hedging.
Where we come in
At Clough Capital, we’ve been running long/short strategies for decades and since 2020 through CBLS (NYSE: CBLS), one of the first actively managed long/short ETFs listed on the NYSE. The strategy runs approximately 60% net long exposure with an active short book, managed by the same research team that runs our broader equity portfolios.
We’ll be sharing more on this topic in the weeks ahead. If you’re an advisor thinking about how long/short exposure fits into a tax-aware framework for your clients, we’d welcome the conversation.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. Prospectus available at www.cloughcapital.com/etfs. Please read the prospectus carefully before you invest. Past performance does not guarantee future results.
The views expressed are those of the authors and are subject to change without notice. This article is for informational and educational purposes only and does not constitute investment advice, an offer to sell, or the solicitation of any offer to buy, and should not be relied upon for any investment decisions. Active management involves higher costs and the risk of underperformance. Short selling involves theoretically unlimited risk.
The Clough Capital ETFs are distributed by Paralel Distributors, LLC. Paralel Distributors, LLC and Clough Capital are not affiliated.
1ETF investors will incur management fees and operating expenses as reflected in the ETF’s expense ratio. Investors may also incur brokerage commissions, premiums or discounts to NAV, bid-ask spreads, and other trading-related costs. Investments in separately managed accounts are subject to advisory fees and other expenses, including but not limited to platform fees, custodian fees, transaction costs, brokerage commissions, and other account-related expenses.
Separately managed accounts and ETFs are distinct investment products with different fee structures, investment processes, tax considerations, liquidity characteristics, and risks. Performance results for one vehicle are not indicative of the performance of the other. Tax outcomes differ because ETFs may benefit from in-kind redemption mechanisms while SMAs may realize taxable gains/losses directly in client accounts.
[i] iCapital, “The Long and Short of Tax-Aware Investing,” April 10, 2026
[ii] AQR, “Loss Harvesting or Gain Deferral? A Surprising Source of Tax Benefits of Tax-Aware Long-Short Strategies,” Journal of Wealth Management, Summer 2024
[iii] Cai, Goldberg & Schneider, “The Role of Taxes in the Rise of ETFs,” Review of Financial Studies, October 2025
[iv] State Street Global Advisors, “Tax Efficiency Is Structural,” 2025/2026