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Short exclusions

Why we ask for a short exclusion list

When you invest in one of Frec's long short strategies, your portfolio includes short positions. A short position involves selling a stock you don't currently own. If you short a position you already hold outside Frec, this is called a "short sale against the box." This creates a neutral position, so gains and losses on that stock net to zero.

The IRS largely eliminated the tax-deferral benefits of shorting against the box with the Taxpayer Relief Act of 1997. This act established the Constructive Sale Rule (Section 1259), which targets transactions that effectively "lock in" gains on an appreciated position without a formal sale. Rather than allowing a deferral of capital gains, this rule triggers a constructive sale, treating the position as if it had actually been sold and making the gains taxable.

To help you avoid this, we ask for a list of your current holdings so we can avoid shorting those positions within our strategies.

What to add to your short exclusion list

You may want to add any single-stock positions (excluding ETFs) you hold outside of Frec, or any stocks you'd simply rather not have shorted.

How to manage short exclusions

During setup

  1. After you choose how you want to fund your account, search for the stocks you want to exclude and add them to your list. Self-managed stocks on Frec are automatically excluded from shorting.
  2. You can add up to 50 stocks to your short exclusion list.

After setup

  1. Select Manage next to "Your direct index."
  2. Select Edit next to short exclusion.
  3. Search for the symbol you want to add, or remove any stock currently on the list.
  4. Select Save changes.

Excluding a stock with an open short position

If the stock has an open short position in your long short index, adding it to the exclusion list automatically closes the short, realizing any capital gains or losses on the position. After that, the stock is no longer shorted in your long short direct index.