Our $100k demo account gained about $19k in roughly a year, net of financing and management fees. It uses a value-tilted 140/40 direct indexing strategy based on the Russell 1000. For comparison, a  $100k investment in a Russell 1000 ETF over the same period would’ve gained about ~$445 less. And here’s the kicker: it also harvested ~$27k in capital losses while appreciating in value. This is a real account, not a backtest - anyone can inspect every position and trade on our website (link in my comment). It’s worth noting that the long short direct index carries a different risk profile and can expect a tracking error of ~1.5%. We chose a value tilt because many of our customers work in tech and already have significant exposure to growth stocks. We wanted to demonstrate how they could lean into value while maintaining broad market exposure. Those $27k in harvested losses can offset capital gains elsewhere. Someone selling appreciated company stock, for example, could use $27k of harvested losses to offset that amount in gains. At a combined 30% tax rate, that could defer a ~$8k tax bill, leaving that money invested in the market instead. We made 140/40 available starting at a $100k minimum, and customers can get started in a few minutes. We also offer 200/100 and 250/150 versions. The additional leverage allows for a stronger factor tilt and creates more opportunities to harvest losses.

Most have heard of tax-loss harvesting. But a different version is attracting the Treasury's attention: ordinary-loss harvesting. It aims to offset ordinary income, like business earnings and, within limits, salary income. Meanwhile, gains can receive more favorable capital gains treatment. This is different from traditional tax-loss harvesting which uses capital losses to offset capital gains, plus up to $3,000 of ordinary income each year. Frec’s Long short portfolios harvest capital losses too. One high-profile example of capital loss harvesting: The Wall Street Journal reported that President Trump’s investment accounts use direct indexing. Ordinary-loss harvesting seeks to go much further. Treasury officials have described sales pitches advertising a $300,000 ordinary loss on a $1 million investment. A new Tax Notes article by NYU law professor @DanielJHemel explains the distinction, using AQR’s TA Delphi Plus fund as an example of ordinary-loss harvesting. Hemel traces the strategy to a “temporary” Treasury exception from 1988 - still in place 38 years later. It lets investors use ordinary losses from certain funds to offset income from businesses they actively run, even when they don’t help run the fund. His proposed fix is to remove that exception through Treasury’s rulemaking process. At @frecfinance, our Long short and Diversify strategies harvest capital losses. They do not pursue ordinary-loss harvesting. We’ve worked with tax counsel in structuring these strategies, and we’ll continue monitoring developments. These distinctions matter in how the topic is covered. CNBC's recent reporting on tax-aware Long short strategies included an “IRS crackdown” section, while noting that officials hadn’t named those long short tax-aware strategies specifically. We’d love to see coverage make clearer which products and which types of losses are under scrutiny, especially in headlines. That helps investors understand which risks may apply to them.

Here’s a small example of how nuanced tax-loss harvesting gets in a long short portfolio: when you close a short at a loss, the loss is recognized on settlement date. When you sell a losing long position, however, the loss is recognized on trade date - usually one business day earlier under T+1. The reason is that, for tax purposes, a short sale is not considered complete until the shares are delivered to close the position. That delivery date also anchors the wash sale window for the short position, so a losing short and a losing long are measured from different days. One day may sound immaterial. But when running long short portfolios at scale, a system that treats every loss as occurring on trade date can miscalculate the wash sale window and, for a December trade, place the loss in the wrong tax year.

Today, every U.S. citizen has a $15M federal estate tax exemption. For a single person, the portion of a taxable estate above $15M can be taxed at 40%. Separately, something else happens at death: appreciated taxable assets receive a step-up in cost basis. If someone bought Apple at $10 and it's worth $500 when they die, the heir's cost basis generally becomes $500. The $490 of unrealized capital gain is never taxed as a capital gain. These are two separate parts of the tax code, and a lot of discussion about tax deferral conflates them. One of the main benefits of tax-loss harvesting is that it can defer capital gains taxes. If those gains remain deferred until death, step-up in basis can eliminate the capital gains tax. But that doesn't eliminate the estate tax. If someone dies with a large taxable estate, the federal government can still collect 40% on the amount above the available $15M exemption. This is why I think describing capital gains deferral as simply "tax elimination" is misleading, as some recent media articles have claimed. Yes, the capital gains tax can disappear at death. But for wealthy estates, a separate 40% tax can still be collected through a completely different part of the tax code. And frankly, that makes intuitive sense. Without step-up, someone could pay capital gains tax and then have the remaining wealth subjected to estate tax at death. The $15M exemption also isn't fixed. It was $5M in 2011 and is $15M today. Congress has changed it before and can change it again. It seems to me that if Congress wants to collect more tax from large estates, lowering the estate tax exemption is the more direct mechanism.

Frec’s long short product asks customers to make a difficult decision: choosing a tilt for their investment towards a factor like value, quality, or growth. Many customers freeze at this step because they’ve been educated to “just buy the index”. I was in that camp too, so I understand the hesitation. What I learned is that a modest factor tilt can help balance exposures elsewhere in an investor’s financial life. Consider a couple working in tech and living in the Bay Area. They may own employer stock, a home whose value is tied to the local technology economy, and technology-heavy investments similar to  QQQ. Taken together, they are likely overexposed to tech and the Growth factor. One way to balance that exposure is to direct new investments toward an index with a modest tilt toward an underrepresented factor, such as Value or Quality. The long and short extensions can reinforce that positioning by slightly reducing exposure to stocks with the strongest Growth characteristics. The customer still owns a portfolio designed to track the same underlying index. Both extensions operate within a defined tracking error, or risk budget, and the portfolio maintains a theoretical beta of ~1. There is also an important side benefit: more powerful tax loss harvesting. Because the strategy holds both long and short positions, it can create opportunities to harvest losses whether the market is rising or falling. For example, a 250/150 Long short direct index targets approximately 4% of annualized tracking error. In statistical terms, roughly two-thirds of one-year outcomes would be expected to fall within 4% above or below the benchmark. The strategy is also estimated to harvest capital losses of ~55% of the initial investment during the first year. We’re excited to continue to bring sophisticated products directly in the hands of self-managed investors.