The implementation question
The strategy was developed from our tax-agnostic quantitative long/short equity models, drawing on the same systems that run our Alternatives division. We offer three configurations, called Max, Diversify, and Enhance. They are best understood as three calibrations, or use cases, of one strategy rather than three separate products.
Every configuration runs the same underlying book. Long the stocks our models rate most attractive, short the names they rate weakest. Proceeds from the short sales help finance the additional long exposure, and the return the strategy pursues comes from the spread between the two books rather than from the market's direction. Because up years and down years both leave some part of the book at a loss, there is generally something to harvest, even in the markets where a long-only program eventually runs dry.
Prism Max
Max runs the strategy at its fullest expression. It seeks to generate pre-tax alpha with a high level of tracking error and to realize substantial capital losses (subject to the client's risk parameters).
It fits an investor who wants to add an uncorrelated return stream to their portfolio and has meaningful capital gains arriving. These clients typically do not have another tax loss harvesting program already in place. Their capital gains might come from a business sale, a carry distribution, appreciated equities that need rebalancing, or a steady stream thrown off by other investment managers.
Prism Diversify
Diversify is configured for the single most common problem we see. A low-basis stock has grown to dominate an investor's portfolio. Selling it all at once realizes years of capital gains in one tax year, and holding it leaves their wealth dependent on one company's performance. Diversify runs the long/short program alongside the position and lets realized losses accumulate, so the position can be sold down in stages. What replaces the position after each sale is broad diversified exposure to an agreed‑upon benchmark.
It suits founder stock, early-employee equity, and long-held or inherited equity positions. The concentrated stock essay in our research library walks through the mechanics in greater detail.
Prism Enhance
Enhance is configured for a different premise. The portfolio an investor already owns is broadly the one they want to keep. So we leave much of those holdings in place and overlay the long/short strategy on top of them. The overlay seeks to add a return stream with little correlation to everything else, while realizing losses that may improve the whole portfolio's after-tax characteristics.
It fits investors with no appetite for wholesale restructuring. That may be because the existing portfolio is already generally sound, or because restructuring would itself trigger too much capital gain to effectively optimize the allocation. Enhance is for improving a good portfolio's after-tax outcomes by adding the benefits of an uncorrelated return stream without the typical opportunity costs of funding a long/short program, since the existing holdings stay invested rather than being sold to raise the capital.
Selecting the right approach
In practice the choice comes down to where the gains are coming from and how much of the current portfolio the investor wants to keep. Anticipated capital gains that are not tied to a concentrated position, or that arise outside the portfolio altogether, may point to Max. A single position that is itself the problem may point to Diversify. A generally good portfolio allocation seeking to potentially improve its risk/return characteristics may opt for 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 | Runs at full strength, seeking pre-tax alpha alongside substantial realized losses | Accumulates the tax capacity to sell the position down in stages | Overlays the long/short strategy on the existing holdings, which stay invested |
| What changes over time | The loss base stays ahead of the gains as they arrive | One name becomes diversified exposure to an agreed-upon benchmark, 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. A Diversify program that finishes its sell-down has become, functionally, a Max program. An Enhance overlay can be run harder as a liquidity event approaches. Because the configurations differ only in calibration, moving between them is an adjustment rather than a liquidation.
What none of them do
Harvested capital losses defer tax, they never eliminate it. That said, deferral itself has well-documented value from decades of research. Losses offset capital gains, and can offset ordinary income only up to a small annual allowance, so every configuration assumes the investor has capital gains worth offsetting in the first place. Long/short investing involves shorting, leverage, financing costs, and tracking error that most index funds do not. And Prism has to be a sound investment first, with the tax benefits layered on top of that.
Where to start
We would start by analyzing your entire financial picture. In most of the conversations we have, an investor's situation points to the right configuration fairly quickly.