A long/short structure uses borrowed capital and short selling to create additional gross exposure. Unwinding that exposure abruptly can trigger taxable gains.
We recommend optimized deleveraging: reducing leverage gradually and tax-efficiently, so you don’t give back the benefits you’ve spent years building.
How the process works
Once you initiate the exit process, the system reviews your portfolio regularly, evaluating embedded gains and losses across positions. It reduces exposure only when realized gains can be paired with sufficient harvested losses to keep the net tax impact at or near zero.
Think of this as a “zero-gain” rule: net realized gains are kept at or below zero during the transition. If closing a position would push gains above that threshold, the optimizer waits.
Because it acts only when the math works, leverage does not decline linearly. It steps down in stages, with quieter periods followed by more meaningful reductions. It is dependent on market conditions.
The practical floor
In practice, many investors can efficiently reduce leverage to a modest level, typically 115/15 to 120/20. Pushing materially below that level typically requires selling highly appreciated positions without sufficient losses to offset them.
As gross exposure declines, the strategy’s capacity to generate excess returns and harvest additional losses also declines. That trade-off is expected during the transition.
Why you can’t exit simply
Liquidating the portfolio outright would likely realize all deferred gains, including gains from appreciated long positions and profitable short positions. In some cases, the resulting tax bill can materially offset the strategy’s prior benefits.
An abrupt exit can undo years of tax management. A deliberate, optimized transition is designed to protect it.