At Chicago Partners Wealth Advisors, we believe thoughtful diversification goes beyond traditional stock and bond allocations. For high-net-worth families and business owners, especially those managing concentrated positions or complex tax situations, incorporating alternative strategies such as long/short equity and trend-following can potentially enhance risk management and after-tax outcomes when implemented carefully and appropriately. 

This article outlines how these strategies work, where they may fit within a broader portfolio, and key tax considerations investors should understand. 

Traditional portfolios often rely on long-only exposure to equities and fixed income. While this approach can be effective over full market cycles, it may be vulnerable during periods of:

• Elevated volatility
• Rising interest rates
• Prolonged equity drawdowns 
• Increased correlations across asset classes

Alternative strategies - when used prudently - may offer differentiated return streams that behave differently than traditional markets.

It is important to note that these strategies are not suitable for all investors and involve additional risks, costs, and complexities.

A long/short equity strategy typically: 

• Buys (goes long) securities expected to appreciate
• Sells short securities expected to decline
• Seeks to generate returns from both security selection and relative value opportunities

• Short selling involves theoretically unlimited loss potential
• Manager skill is critical 
• Higher turnover can create tax implications 
• Strategy dispersion between managers can be significant 

From a tax perspective, short-term trading activity may generate short-term capital gains, which are generally taxed at higher rates than long-term gains. Careful manager selection and coordination with an overall tax plan essential.

These strategies are generally intended for sophisticated investors who understand the associated risks.

At Chicago Partners, we view alternative strategies not as return "enhancers" in isolation, but as tools that may help: 

• Reduce overall portfolio volatiloty
• Mitigate downside risk
• Improve risk-adjusted return potential
• Provide differentiated sources of return

However, integration must consider:

Asset Location

Certain strategies may be more appropriate in tax-advantaged accounts due to turnover and income characteristics.

Liquidity Needs

Some alternative vehicles may have limited liquidity or lock-up periods.

Fee Structures

Alternative strategies often involve higher fees than traditional investments.

Portfolio Role Clarity 

Is the strategy intended as:

• An equity hedge?
• A crisis alpha allocation?
• A volatility dampener?
• A return diversifier?

Clear intent improves implementation discipline.

Long/short and trend-following strategies involve complex instruments, leverage risk, counterparty exposure, and model risk. They require:

• Rigorous manager due diligence
• Ongoing monitoring
• Careful position sizing
• Alignment with investor risk tolerance and objectives

These strategies are generally intended for sophisticated investors who understand the associated risks.

The Tax-Aware Advantage

Tax efficiency is not about avoiding taxes - it is about managing them throughtfully. A coordinated approach may include: 

• Strategic tax-loss harvesting
• Gain deferral planning
• Asset location optimization
• Charitable giving strategies
• Concentrated position management

When alternative strategies are incorporated deliberately within a comprehensive financial plan, they may complement traditional allocations in ways that improve after-tax outcomes over time.