The implementation question
An investor persuaded that tax-aware long/short investing makes sense still has to decide what it should replace, which gains it should offset, and what it should leave alone. Those are questions about the investor's balance sheet more than about the strategy, and the answers differ enough from one balance sheet to the next that we do not implement the strategy the same way for everyone.
Prism is how we implement the strategy for clients. Underneath it is one quantitative long/short equity engine, drawing on the same models that run our Alternatives division, applied with a specific focus on after-tax outcomes. We offer it in three configurations, named Max, Diversify, and Enhance, and they are best understood not as three products but as three calibrations of the same engine to three recurring situations.
What the configurations share
Every configuration runs the same underlying book, long the stocks our models rate most attractive, short the names they rate weakest. The proceeds of the short sales finance much of the additional long exposure, so the extension adds little new capital requirement, and the return it pursues comes from the spread between the two books rather than from the market's direction. Up years and down years alike leave part of the portfolio at a loss, and every such position is a candidate for being realized, which is why the structure can generate realized losses in markets where long-only harvesting has little left to sell.
Realized losses offset realized gains from any source, and unused losses carry forward. Which gains, whose gains, and what happens to the rest of the portfolio while the losses accumulate are where the three configurations part ways.
Prism Max
Max runs the strategy at full strength. It seeks to realize losses at the highest rate the client's risk parameters allow while pursuing the potential alpha in the long/short book.
The investor it fits has meaningful capital gains arriving, this year or over the next several, and no harvesting program already working on their behalf. The gains might come from a business sale, a carry distribution, appreciated funds that need rebalancing, or a recurring stream of gains generated by other managers. In each case the tax is coming whether or not anyone plans for it, and Max is designed to build the offsetting losses in advance, sized against the gains they are meant to offset.
Prism Diversify
Diversify points the same engine at the most common single problem we see, a low-basis stock that has grown to dominate a portfolio. Selling the position all at once realizes years of gains in a single tax year, and holding it leaves a family's wealth dependent on one company. Diversify runs the long/short program alongside the position, letting realized losses accumulate so the stock can be sold down in stages, with each stage's gain met by losses already accumulated. What replaces the position after each sale is broad, diversified exposure rather than another bet on one name.
It suits founder stock, early-employee equity, and long-held or inherited positions. The concentrated stock essay in this library walks through the mechanics in detail, but the short version is that Diversify is designed to generate the one thing the conventional menu of collars, exchange funds, and margin loans does not, which is the tax capacity to actually sell.
Prism Enhance
Enhance starts from a different premise, that the portfolio the investor already owns is broadly the one they want. It leaves those holdings in place and overlays the long/short strategy on top of them, run at a tracking-error level and against a benchmark chosen with the client. The overlay seeks to add a return stream with little correlation to the rest of the portfolio while realizing losses that improve the whole portfolio's after-tax characteristics.
It fits investors who have no appetite for wholesale restructuring, perhaps because the existing portfolio is sound, or because restructuring would itself trigger the very gains they are trying to manage. Enhance is the configuration for improving a good portfolio's after-tax outcomes without replacing it.
Telling them apart
In practice the choice reduces to two questions, where the gains are coming from and how much of the current portfolio the investor wants to keep. Gains without a dominating position point to Max. A single position that is itself the problem points to Diversify. A portfolio worth keeping points to Enhance.
| Prism Max | Prism Diversify | Prism Enhance | |
|---|---|---|---|
| The starting point | Capital gains arriving, with no harvesting program working on the investor's behalf | A low-basis position that has grown to dominate the portfolio | A sound portfolio the investor intends to keep |
| What the program does | Builds losses at full strength, sized against the gains they are meant to offset | Accumulates the tax capacity to sell the position down in stages | Overlays the long/short strategy on the existing holdings, against a benchmark chosen with the client |
| What changes over time | The loss base stays ahead of the gains as they arrive | One name becomes a diversified portfolio, sale by sale | The portfolio stays, and its after-tax character improves |
| The usual fit | Business sellers, carry recipients, investors with recurring gains from other managers | Founder stock, early-employee equity, long-held or inherited positions | Investors for whom restructuring would itself trigger the gains they are trying to manage |
The boundaries are softer than the names suggest, which is a consequence of sharing one engine. A Diversify program whose sell-down completes has become, functionally, a Max program, and it continues accumulating losses against whatever gains come next. An Enhance overlay can be run at a higher rate as a liquidity event approaches. Because the configurations differ in calibration and not in kind, moving between them is an adjustment rather than a liquidation.
What none of them do
The caveats from the other essays apply with equal force here. Harvested losses defer tax rather than eliminate it, although the deferral itself has value the research literature has documented for decades. Losses offset capital gains, not ordinary income beyond a small annual allowance, so every configuration presumes the investor has gains worth offsetting. Long/short investing involves shorting, leverage, financing costs, and tracking error that index funds do not, and none of it belongs in a tax-exempt account. And Prism has to be a sound investment first, with the tax benefits layered on top.
Where to start
The sensible starting point is not the configuration menu but the balance sheet, because in most of the conversations we have, the investor's situation determines the configuration quickly.