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What’s Behind the Growth of Tax Aware Strategies in the U.S.?
Rob Poole, CFA, Co-Head Equity Strategies, Head of Fundamental Equity Research
Tax-aware long/short strategies are separately managed accounts and hedge fund partnerships that extend a core equity portfolio with leverage and short positions, typically ranging from 130/30 up to 250/150. The goal is to generate pre-tax alpha alongside a much larger pool of realizable losses than traditional tax-loss harvesting can produce. Those losses can offset capital gains elsewhere, making the strategies potentially attractive to founders, private equity and venture capital investors, and anyone sitting on large embedded gains depending on their individual circumstances.
In a long-only direct indexing portfolio, loss harvesting naturally fades as positions appreciate over time. Adding shorts and leverage changes that math. In the United States, a 200/100 structure may harvest roughly 40% of portfolio value in losses during its first year, compared with the mid-teens typical of long-only direct indexing. The ongoing rebalancing required to maintain target leverage continuously creates fresh cost basis, and with it, new harvesting opportunities. The engine simply does not burn out the way long-only harvesting does, and amid mega initial public offerings and record private-market wealth creation, demand for those losses looks structural.
The direct indexing wave that began in 2018, followed by the wave of acquisitions among large asset managers between 2020 and 2022, built a large base of investors in direct index portfolios. By 2025, many of those investors had become tax locked, holding embedded gains too large to unwind, and are now migrating toward long/short strategies that can realize more meaningful, consistent, and persistent losses. The growth has been remarkable: AQR Capital Management's tax-aware strategies grew from approximately USD $3 billion to roughly USD $70 billion in three years, and by the end of 2025, more than a third of the firm's USD $180-plus billion in total assets sat in tax-aware funds. Quantinno Capital Management, founded by a former AQR principal, now manages approximately USD $50 billion. Industry estimates suggest more than USD $150 billion sits across tax-aware long/short strategies in aggregate, within a broader tax-efficient investing market exceeding USD $1 trillion.
Long tern flow is net of realizations, distributions, and reinvested dividends
Chart 1 Source: Autonomous Research as of Q12026. Affiliated Managers Group (AMG), Franklin Templeton Inc. (BEN) and BlackRock Inc (BLK) were selected as the 3 publicly traded firms who are growing in tax-aware long short strategies AUM and flows.
Chart 2 Source: Autonomous Research as of Q12026. Affiliated Managers Group (AMG), Franklin Templeton Inc. (BEN) and BlackRock Inc (BLK) were selected as the 3 publicly traded firms who are growing in tax-aware long short strategies AUM and flows. Long-term flow is net of realizations, distributions, and reinvested dividends. Long-term flow is an industry standard measurement for non-money market funds
Tax-aware long/short strategies have become on of the fastest-growing category in U.S. asset management because they convert something investors already hold in abundance, embedded gains, into demand for a scalable investment product. That rapid growth is also testing industry infrastructure: custodians and prime brokerages are feeling the strain, reflected recently in higher minimums at Charles Schwab and Fidelity's decision to pause new flows into the strategy.
Rob Poole, CFA, Co-Head Equity Strategies, Head of Fundamental Equity Research
Neil Simons, Portfolio Manager, Head of Multi-Strategy
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
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All data sourced from Picton Mahoney Asset Management Research unless otherwise cited.
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