The $150 Billion Bet on Borrowing and Tax Losses
More than $150 billion sits in Wall Street long-short strategies that use leverage, or borrowed money, and tax-loss harvesting to try to beat the market while cutting tax bills. Take On The Week They are built for wealthy investors with taxable accounts. The goal is extra return after taxes, not before taxes.
The cost is stated upfront. All-in costs run 1.5% to 3% a year for investment management plus financing and borrowing fees, according to The Wall Street Journal. The Wall Street Journal That covers running the long and short positions, owning some stocks while betting others will fall, plus paying to finance the leverage and paying stock-loan fees to borrow shares for the short side.
The tax work depends on owning individual stocks. Direct indexing means holding the underlying stocks directly rather than through a pooled fund, which creates more chances to harvest losses, according to Schwab. Schwab Tax-loss harvesting means selling losers to offset winners and lower the tax bill. Harvested losses can also offset up to $3,000 a year in ordinary income such as wages. Schwab
Schwab Personalized Indexing is Schwab's direct-indexing offer for custom portfolio construction and tax management. It sits inside a business that reported a record $163.9 billion in core net new assets for the quarter, and $519.4 billion in total asset gathering in 2025, according to Reuters. Reuters
Schwab's net interest margin, the spread between what it earns on loans and pays for funding, was 2.88% for the first three months of the year, according to Bloomberg. Bloomberg Average margin loans tied to client strategies were $33.1 billion for the three months ended June 30, 2026, and $23.7 billion for the six months ended June 30, 2026, according to a company filing. SEC filing
The broader context here is tax benefit minus borrowing cost. A 1.5% to 3% yearly drag means the strategy needs steady new losses, value from pushing taxes into the future, and enough spread between individual stocks to keep harvesting without drifting from its market target. Leverage widens both the loss opportunities and the dependence on timing. Realized losses can be used. Paper tracking gaps cannot.
In my view, review should focus on netting, turnover, and how the short side behaves through the year. That means separating the management fee from financing and borrow costs, asking how stored-up losses get used against gains elsewhere, and testing what happens when stocks move together and borrowing gets costly. The flows Schwab reported point to lasting demand for custom tax help among taxable investors. Lasting demand does not change the math. After-tax gains still have to clear that high yearly charge.
