Investors spend an enormous amount of time thinking about returns. They compare managers, debate fees, chase a few extra basis points of alpha and worry about whether they are beating the benchmark. But there is another number that gets far less attention: how much of that return the investor actually keeps.
For taxable investors, that difference can be significant. Ray Carroll, Managing Director at Neuberger and CIO of the Neuberger Breton Hill quantitative investing team, estimates that the typical large-cap U.S. mutual fund experienced roughly 270 basis points of annual tax drag over the past decade 1. That is 2.7% a year disappearing to taxes, and over a decade or two, the effect on ending wealth can be enormous. That is the starting point for a much bigger conversation about what Carroll calls tax alpha.
Tax-Loss Harvesting Works. Until It Starts Running Out of Fuel.
The basic idea behind tax-managed investing is not especially complicated. When investments decline, an investor can realize those losses and use them to offset capital gains elsewhere. When investments appreciate, gains can be deferred, keeping more capital invested and compounding.
The problem appears when the strategy works for a long time. After years of rising markets, many portfolios become filled with highly appreciated positions, leaving fewer losses left to harvest. Carroll calls this decay. It does not mean the portfolio has stopped being tax efficient. Deferring gains still has value, particularly when the money that would have gone toward taxes remains invested, but the portfolio's ability to continually generate new losses becomes weaker.
That matters most for investors who have gains coming from somewhere else. Maybe a business is about to be sold, maybe private equity investments are realizing gains, or maybe an executive is sitting on a massive concentrated stock position that needs to be reduced. Those investors do not simply want to avoid creating taxes inside their public equity portfolio. They may want that portfolio to help solve a tax problem somewhere else. That is where things get more interesting.
Why 130/30 Changes the Equation
Carroll's team can extend a traditional equity portfolio to 130% long and 30% short, while the investor remains approximately 100% net invested in the market. The additional long exposure creates investments with fresh cost bases, and the short portfolio does the same thing from the opposite direction, making the harvesting opportunity far more persistent than it is in a traditional long-only portfolio. When markets fall, losses may appear on the long side. When markets rise, losses may appear on the short side.
There is also another use case: concentrated wealth. Imagine an executive or early investor sitting on a hugely appreciated stock position where selling immediately could produce a painful tax bill. Instead, Carroll describes building a diversified long-short portfolio around the existing position. As losses are harvested elsewhere in the portfolio, portions of the concentrated stock can potentially be sold against those losses, giving the investor a path to gradually diversify rather than choosing between concentration risk and a massive immediate tax event.
The Investment Case Still Has to Come First
There is an important catch. Carroll is adamant that investors should not use complicated strategies simply because they want to pay less tax. The investment strategy has to make economic sense first, and only then should it be implemented as tax efficiently as possible.
That distinction becomes especially important once leverage and short selling enter the conversation. Carroll, who began his career in risk management, compares leverage to salt: a little can improve the meal, but dump the entire shaker on it and you ruin it. His point is not that leverage is harmless, but that leverage can be used deliberately for capital efficiency without simply doubling down on market risk.
The strategy also requires serious infrastructure. Every investor has a different cost base, different holdings and different tax circumstances, and harvesting opportunities need to be monitored throughout the year, not just during a hurried December rebalance. For Canadian investors, the details matter even more. Average cost base calculations, Canadian-dollar reporting, superficial loss rules and Canada's ability to carry capital losses back three years all make the implementation different from the United States. This is not a strategy that can simply be copied across the border.
A Different Way to Think About Alpha
Perhaps the biggest takeaway from Carroll's argument is also the simplest: investing is not only about what a portfolio earns. It is about what remains. Market alpha can be difficult to predict and even harder to produce consistently, but tax efficiency operates under a more knowable set of rules. For advisors working with wealthy taxable clients, business owners, executives or families with private investments, that makes the after-tax conversation increasingly difficult to ignore.
And it raises a question worth asking: if investors are willing to spend so much energy trying to earn another 20 basis points, how much attention should they be giving to the hundreds of basis points that may be leaving the portfolio through taxes?
Listen to the full conversation with Ray Carroll on Insight is Capital for a deeper look at tax alpha, long-short investing, concentrated positions, leverage and why the return investors keep may matter far more than the return they see on a performance report.
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Footnote:
1 "The Tax Alpha Gap: 260 Basis Points Hiding in Plain Sight." AdvisorAnalyst, 4 Aug. 2026.
