Exiting is ideally a deliberate and tax-aware process, not instantaneous. A long/short structure uses borrowed capital and short selling to create additional gross exposure. Unwinding that exposure abruptly can trigger taxable gains that have the potential to undo years of careful tax management.
You decide when to begin. BKLN manages execution from there.
How the process works
Once you initiate the deleveraging, 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 it as a "zero-gain" goal: net realized gains are targeted to stay at or below zero during the transition. If closing a position would push gains above that threshold, the optimizer evaluates this and attempts to ensure gains are not triggered.
Because it seeks to act only when the math works, leverage doesn't decline linearly. It steps down in stages, which can mean quieter periods followed by more meaningful reductions. The pace depends on market conditions.
Timeline expectations
There's no fixed timeline, but most investors should expect several years, not months. Exiting too quickly potentially reduces the tax benefit.
Some investors unwind slowly to spread taxes across multiple years. Others accelerate if outside liquidity (from an IPO, business sale, or other event) gives them flexibility to absorb gains faster.
To preserve efficiency, exits should be managed within the strategy. Unwinding positions independently can result in unintended gain realization.
The practical floor
In practice, many investors can efficiently reduce leverage to a modest level, typically targeting 115/15 to 120/20. Pushing materially below that 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 likely shouldn't just liquidate
Liquidating the portfolio outright would likely realize significant 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.
Tax outcomes vary by individual circumstances and market conditions. Consult your tax advisor when planning an exit.