Why do I need to provide a list of positions to exclude from shorting for Frec’s long short strategy?

When investing in Frec’s long-short strategies, your portfolio will include short positions. A short position involves selling a stock you do not currently own. If you attempt to short a position you already hold, this is called a “short sale against the box.” This action creates a neutral position, ensuring that all gains and losses for that stock net to zero.

However, 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 financial position without a formal sale. Instead of allowing a deferral of capital gains, this rule triggers a constructive sale, treating the position as if it were actually sold and making the gains taxable. To prevent this, we obtain a list of your current holdings to avoid shorting those positions within our strategies.