Schwab is exploring an expanded version of its direct-indexing capabilities that would apply to long-short accounts, Chief Executive Officer Rick Wurster told analysts on Thursday's earnings call. The pitch from Wurster: by keeping more control over the setup, Schwab can run the strategies more efficiently on both the operations side and the balance sheet. As he put it, "It's a way we can deliver sustainable long-short strategies to our clients in a way that is operationally and financially manageable over the longer term." The firm already provides custody for these approaches and has recently tightened how clients can access them.
Bringing the mechanics in-house could simplify processes and make the economics cleaner for Schwab. The company has been narrowing who qualifies for tax-aware long-short strategies on its platform.
Tax-loss harvesting has grown fast enough to catch regulators' attention. Last month the Internal Revenue Service sent a set of warnings to Wall Street, stating that it intends to issue guidance and could move to block certain trades that money managers use to harvest losses and cut tax bills, including on ordinary income. A method under scrutiny is a long-short strategy associated with AQR Capital Management, often referred to as the world's largest hedge fund.
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Schwab told clients in early September that some long-short separately managed accounts now require at least $10 million to fund, up from $1 million. It also said it will stop taking on new clients and additional deposits for portfolio margin accounts, which employ higher leverage.
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