Home Education center Long Short Direct Indexing: Introduction

Long Short Direct Indexing: Introduction

Unlock tax-efficient alpha by combining passive indexing with targeted long/short direct indexing portfolio overlays.

Direct indexing lets you hold the individual stocks of an index, enabling tax-loss harvesting, custom factor tilts, and full transparency. By adding a controlled short book alongside your long core, you create a 100% net-market exposure fund that can express active views at scale. Here’s how each flavor works—and why we name them 110/10, 120/20, 130/30, and 140/40.

How Long/Short Direct Indexing Works

Start with 100% Core – You own the typical index basket (e.g., S&P 500) worth 100% of your portfolio value.

Short “X%” – You sell short X% of the portfolio value in names you expect to underperform. This raises cash equal to X% of NAV.

Reinvest +X% – You take the cash proceeds and buy an extra X% of your highest-conviction long ideas.

Result:
- Long exposure: 100% core + X% extra = (100 + X)%
- Short exposure: X%
- Net market exposure: (100 + X) – X = 100%

Because you end up with (100 + X)% long and X% short, it’s called an (100 + X)/(X) strategy—for example, 130/30 when X = 30.

Strategy Deep Dives

– 110/10 Long/Short Direct Indexing – Light-Touch Alpha Boost

Structure: 110% long / 10% short
Mechanics:
Short the 10% worst-performers in your index (by signal)
Recycle proceeds to boost core names by 10%
Why “110/10”?
100% base + 10% extra long = 110% long
10% short = net 100% exposure
Use Cases & Benefits:
Small active tilt—ideal for advisors who want a dash of alpha without large tracking error
Tax-loss harvesting remains robust—shorts can be recycled into fresh positions
Key Considerations:
Lower borrowing costs and margin requirements
Minimal operational overhead

– 120/20 Long/Short Direct Indexing – Balanced Alpha Tilt

Structure: 120% long / 20% short
Mechanics:
Short top 20% names on your “underweight” list
Add 20% to your strongest factor or theme ideas
Why “120/20”?
100% core + 20% extra long = 120% long
20% short = net 100%
Use Cases & Benefits:
Medium active risk—comfortably express larger convictions (e.g., ESG screens, momentum)
Distinctly different return profile vs. plain-vanilla indexing
Key Considerations:
Moderate margin and borrow costs
Requires clear signal or factor framework

– 130/30 Long/Short Direct Indexing – The Institutional Core

Structure: 130% long / 30% short
Mechanics:
Short 30% of the portfolio in names with weakest outlook
Deploy 30% proceeds into high-conviction ideas (quality, low vol, sector rotation)
Why “130/30”?
100% base + 30% extra long = 130% long
30% short = net 100%
Use Cases & Benefits:
Classic hedge-fund replacement in a separately managed account (SMA)
Tactical alpha across themes without giving up tax efficiency
Key Considerations:
More robust infrastructure for short borrowing and compliance
Risk overlays are critical to cap net risk and sector exposures

– 140/40 Long/Short Direct Indexing – High-Octane Alpha Expression

Structure: 140% long / 40% short
Mechanics:
Short the 40% most unattractive securities
Reinvest in your best 40% ideas
Why “140/40”?
100% core + 40% extra long = 140% long
40% short = net 100%
Use Cases & Benefits:
Aggressive managers or UHNW clients seeking maximum differentiated return
Full expression of conviction in both long and short books
Key Considerations:
Highest funding and borrow costs
Demands deep research, risk management, and compliance controls

Implementation Tips

Signal Framework: Define easy-to-implement quantitative or fundamental screens to rank longs/shorts.
Risk Budgets: Cap sector, factor, and position limits to control unintended bets.
Tax Management: Systematic loss harvesting on long and short legs enhances after-tax returns.
Technology Stack:
Portfolio Construction: API-driven engines (e.g., Alphathena)
Execution: Smart-order routing, high-touch or algos for low slippage
Reporting: Real-time exposure dashboards and compliance flags

Why Direct Indexing + Long/Short?

Customization: Tailor every exposure to client objectives and constraints.
Transparency: Full visibility into each long and short position.
Tax Efficiency: Harvest losses on both sides of the book.
Net Neutrality: Maintain 100% market exposure while seeking alpha.

Ready to elevate your indexing toolkit? Explore Alphathena’s Long/Short Direct Indexing platform and start designing your own 110/10–140/40 portfolios today.

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