Tax-aware long/short AUM growth will accelerate if one problem is solved

Charles Schwab does not pay short rebate. But long/short strategies depend on it.

Tax-aware long/short strategies depend on short rebate

You can get up to speed on tax-aware long/short strategies here and here, but the quick and dirty is that strategies like the 130/30 and 250/150 “extend” the traditional long-only mandate with leverage and shorts, harvest (a lot of) losses in all markets and may grow to $30 billion AUM in 2025 from $20 billion AUM(ish) today.

Short rebate makes these strategies viable.

The major custodians for tax-aware long/short strategies are Fidelity, Pershing, and Interactive Brokers.

Charles Schwab, notoriously, does not pay short rebate, possibly keeping all collateral interest for itself. But that’s changing. Some large RIA clients are receiving a portion of collateral interest. And a little bird told me Charles Schwab will expand short rebate to most (if not all) clients in 2025.

This means roughly half of all advisers could soon access tax-aware long/short strategies – managed by AQR, Quantinno, Brooklyn Investment Group, Invesco, and a few others – since Charles Schwab has lower AUM minimums than other custodians and is the custodian of choice for many new RIAs.

But what is short rebate, and why is it a dealbreaker?