Animal Spirits Podcast: Talk Your Book – After-Tax Alpha (March 16, 2026)

Hosts: Michael Batnick & Ben Carlson
Guest: Erco Atula (CEO & CIO, Brooklyn Investment Group, powered by Nuveen)

Episode Overview

This episode takes a deep dive into the rapidly evolving world of tax-advantaged long/short SMAs (Separately Managed Accounts), a strategy that's gaining traction among wealth managers looking to boost after-tax returns for clients with significant capital gains or concentrated positions. Ben and Michael are joined by Erco Atula, CEO and CIO of Brooklyn Investment Group, now part of Nuveen, to explore how combining direct indexing, leverage, and long/short overlays can create powerful opportunities—and address the complexities and risks that come with them.

Key Discussion Points and Insights

1. Evolution of Direct Indexing and Long/Short Strategies

• Origin & Skepticism:
  Direct indexing was met with skepticism by ETF proponents; ETFs were already seen as efficient, simple, and tax-advantaged. Direct indexing appeared unnecessarily complex—until its synergies with wealth management became clear ([00:45], Ben Carlson).

• Magic of Loss Harvesting:
  Leveraging long/short overlays on direct indexing unlocks the ability to realize and harvest losses at a much greater scale, which is immensely valuable for clients realizing large gains from events like business or real estate sales ([01:48], Ben Carlson):

  “Sometimes when you see what this stuff can do, you almost kind of go, this doesn't seem like it should be legal or fair that you can harvest so many losses.”

• No Free Lunch:
  Michael stresses that, while powerful, these are not "too good to be true" solutions—there’s no alchemy, and the benefits come with complexities and ongoing commitments ([02:00], Michael Batnick):

  “It's not a free lunch. It's not too good to be true. There's no alchemy… it's not like a rip the Band-Aid off short-term solution.”

2. Introduction to Brooklyn Investment Group and Nuveen

• Brooklyn Investment Group’s Evolution:
  Founded in 2021 as a tech-powered asset manager, primarily serving RIAs, Brooklyn was acquired by Nuveen in 2025, allowing them to scale their systematic investing and tax management platforms ([03:48–04:32], Erco Atula):

  “Nuveen has both distribution and client service, so we've been able to really leverage the Nuveen capabilities... and focus on what we're really good at, which is systematic investing, tax management, and continuing to scale the platform.”

3. Tax-Advantaged Long/Short SMA Strategies

• Strategy Evolution:
  Combining long/short investing (once restricted to hedge funds) with direct indexing is now possible at the retail SMA level, largely due to new technology and market infrastructure ([05:42], Erco Atula).

• Why Advisors Use These Strategies:

  • Liquidity Events: Offset gains from business sales, real estate, or private equity distributions.
  • Concentrated Stock Positions: Unwind large holdings (e.g., Nvidia, tech stocks) in a tax-neutral way.
  • Portfolio Migration: Transition legacy portfolios managed elsewhere into tax-optimized, advisor-run accounts ([08:27], Erco Atula).

• Addressing Complexity:
  Many advisors are hesitant about margin and shorting, associating it with hedge funds. Education is key to overcoming these barriers ([07:53–08:27], Ben Carlson & Erco Atula).

4. Scaling & Technology Challenge

• Bespoke Portfolios at Scale:
  Managing thousands of custom, daily-rebalanced long/short accounts requires robust software engineering and automation—the hardest part of the business ([11:17], Erco Atula):

  “Imagine running tens of thousands of accounts… the investment process is actually meeting software engineering.”

• Advisor Flexibility:
  Advisors can bring their own models for the long-only ‘core’ of the portfolio and can define their preferred stock selection processes for the long/short overlay—though most lean on Brooklyn’s proprietary signals ([13:41–15:51], Erco Atula).

5. How Much More Tax Alpha Does Long/Short Provide?

• Quantifying the Advantage ([16:26], Erco Atula):

  • Traditional Direct Indexing (Long Only): ~10% realized losses in the first year on a $10M portfolio.
  • Long/Short 130/30: ~25% realized losses in the first year.
  • Higher Leverage (250/150): Up to ~85% realized losses in year one ([27:54]):

    “For a 250, 150 type of strategy, you're looking roughly about 85% of realized losses in the first year as a percentage of the initial portfolio value.”

• Application:
  Particularly useful for clients with urgent, time-sensitive needs to realize losses—like after a big liquidity event ([22:10], Michael Batnick & Erco Atula).

6. Risks & Leverage

• Range of Leverage:

  • Entry-level (110/10), up to extreme levels (325/225), limited by custodians ([18:08], Erco Atula).
  • Gross exposure can reach up to 550%, though regulations, risk, and client objectives may restrict how far one goes.

• Tracking Error & Risk ([20:05], Erco Atula):

  • Higher leverage increases tracking error versus the benchmark.
  • Example: 1.5-2% tracking error for 130/30; 7-8% for 250/150.

  “If a 13030 strategy is running with a tracking error of say 1.5% to 2%, then a 250, 150 would be running at a tracking error of 7 to 8%.”

• Market Risk & Client Suitability ([21:35], Erco Atula):
  Strategies must be run for valid investment or tax-planning needs, not just to “chase more” or because it sounds exciting.

7. Use Case: Market Neutral for Maximum Tax Alpha

• Personal Example ([22:44], Erco Atula):
  Following the Brooklyn-Nuveen acquisition, Erco himself put his payout into a 275 long/275 short (market neutral, beta zero) portfolio to maximize loss harvesting before transitioning the portfolio to his long-term allocation:

  “My strategy … was 550% of notional, but split evenly between the long and the short side … the focus was to juice up the tax alpha and then I'll revisit my asset allocation in the following year.” ([24:00]).

8. After-Tax Complications & Exit Planning

• Not a Free Ticket Out:
  Harvested losses embed gains elsewhere in the portfolio. If a client sells out shortly after tax harvesting, the deferred gains are realized and taxes must be paid ([29:27], Michael Batnik; [30:05], Erco Atula).

  “All of these strategies are tax deferral strategies. We're not canceling taxes, we're deferring taxes ... unless you get a step-up in basis.” ([30:49], Erco Atula)

• Deleveraging Path:
  After aggressive loss harvesting, Brooklyn works with clients to unwind leverage and reallocate portfolios in a way that is generally gain-neutral year over year.

• Planning Tools:
  Having individual positions also allows for efficient gifting of highly appreciated stocks to charity.

Notable Quotes & Memorable Moments

• On the Power of These Strategies:

  “It almost seems too good to be true. I know it's not. It really is incredible.” ([28:26], Michael Batnik)

• On the Importance of Economic Substance Over Pure Tax Harvesting:

  “It is important to have economic substance in whatever long/short strategy you're running…We should be willing to run these strategies without the tax management component.” ([25:41], Erco Atula)

• On Risks of Crowded Trades:

  "If you go the factor-based direction, make sure that you're aware that there's some crowding risk there... We saw that in the 2007 Quant crash, which a lot of people have forgotten by now." ([25:41], Erco Atula)

Timestamps for Key Segments

• 00:45 — Ben’s introduction to direct indexing skepticism and ETF comparisons
• 02:00 — Michael on no free lunch and misconceptions
• 03:48 — Erco Atula introduces Brooklyn Investment Group and Nuveen partnership
• 05:42 — The invention and evolution of tax-advantaged long/short SMAs
• 08:27 — Adviser/client use cases and overcoming complexity
• 11:17 — The technology challenge for scaling individualized portfolios
• 13:41 — Flexibility: Advisors can use their own or Brooklyn’s models
• 16:26 — Quantifying tax loss harvesting with/without long/short overlays
• 18:08 — Leverage limits and strategies (from 1.10/10 to 3.25/2.25 exposures)
• 20:05 — Tracking error explained
• 22:44 — Erco’s own market-neutral strategy post-liquidity event
• 25:41 — Need for economic substance and risk of crowded trades
• 27:54 — Expected realized loss percentages with various strategies
• 29:27 — Michael on “endgame” consequences of harvesting and exit
• 30:05 — Erco explains gain-neutral deleveraging and the tax tradeoff

Conclusion & Where to Learn More

Erco invites advisors interested in these advanced SMA strategies to reach out to Brooklyn Investment Group via Nuveen for in-depth discussion and partnership ([32:08]).

For more episodes: [Animal Spirits Podcast Archive]
To explore Brooklyn Investment Group's offerings: [Nuveen.com]