Tax-Advantaged Long-Short Investing with Erkko Etula
"Any one of these tax loss harvesting strategies adds incremental risk. That is the reason the IRS is okay with these things — because we are adding investment risk."
— Erkko Etula
Wall Street is building a trillion-dollar business around slashing the tax bills of wealthy investors. The innovations are real, and so are the risks — because the mechanics are leverage and shorting on someone else's balance sheet. Erkko Etula built one of the firms doing this, after spending years studying what happens when that balance sheet disappears.
Key Takeaways
1. Tax-advantaged long-short is the most consequential wealth management innovation since the ETF — and it changed the time horizon from years to months.
For most of wealth management history, tax-loss harvesting compounded slowly over multi-year holding periods. Combining direct indexing with a long-short overlay can rewrite that math. Because both the long book and the short book throw off harvesting opportunities, meaningful realized losses can be generated in months rather than years. The clients who care most are the ones with a known liquidity event on the calendar — a concentrated stock sale, a private fund exit, an IPO unlock — where the window to offset gains is eleven months at best, not eleven years.
2. Risk management has three layers, and single-name concentration is where these strategies actually break.
The benchmark beta is what the client signed up for — stocks, bonds, the headline allocation. The tracking error around that benchmark is the cost of running the long-short overlay. The third layer is where things get dangerous: shorting a stock that rallies 100% in a day on a 1% position costs you a percent of the portfolio, and the damage compounds when leverage and multiple shorts are involved. Running these strategies across thousands of personalized accounts is an operational problem as much as an investment problem — every position has to be interrogated regularly against an active weight bound, with explicit rules to bring breaches back into line before they matter.
3. These strategies work because they carry real investment risk. That is not a bug. It is the deal.
What makes a tax-advantaged long-short strategy legal is that it has genuine economic substance — actual views, actual short positions, actual tracking error, actual tail risk. The tax benefit exists because the risk does as well. Investors and advisors who treat this as "free tax alpha" misunderstand what they own. The right frame from day one is the failure-mode question — what does it look like if this works against you, and are you still okay? The worst outcome in wealth management is not the loss itself. It is the client saying "I didn't sign up for this."
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About Erkko Etula
Erkko Etula is CEO of Brooklyn Investment Group, now wholly owned by Nuveen. He spent a decade as a Managing Director at Goldman Sachs rebuilding the wealth management investment process for taxable clients before founding Brooklyn in 2021. His earlier academic work at the New York Fed on broker-dealer balance sheets and risk appetite earned him the Smith Breeden Prize for Outstanding Capital Markets Research and the 2016 Engel Prize for Financial Econometrics. Originally from Finland, he holds an undergraduate degree from MIT — where Paul Samuelson advised him to drop physics and focus on economics — and a Ph.D. from Harvard.
Timestamps
00:00 — Introduction
01:30 — From Finland to MIT to Paul Samuelson, and the path to Harvard
04:00 — Broker-dealer balance sheets as a real-time signal of risk appetite
05:30 — What Lehman's collapse confirmed about funding liquidity
09:30 — Goldman: rebuilding the wealth management process for taxable clients
17:00 — Mutual funds, ETFs, direct indexing — and where long-short fits in the arc
20:00 — Direct indexing 2.0: months, not years
21:30 — Walking through the mechanics of a long-short account
23:00 — Risk management first, tax management second
27:30 — Three risk layers and why single-name concentration is the dangerous one
31:30 — Building Brooklyn: humility, team, and certainty as poison
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Disclaimer
The content of "Treussard Talks" is for informational and educational purposes only and should not be considered financial advice. The views expressed are those of the host and guests and do not necessarily reflect the opinions of Treussard Capital Management or its affiliates. Consult your own financial advisor before making any investment decisions. For full disclosures, visit treussard.com.