35 Pages Posted: 28 Jan 2017 Last revised: 12 Dec 2017

Date Written: April 3, 2017

Abstract

We study in this paper the consequences of short selling in the context of quantitative investment strategies. Short positions not only allow investors to benefit from the anticipated underperformance of securities, they can also create tax benefits because they enhance the opportunities to time capital gain realizations. Our results show that investment strategies that take advantage of short selling can generate superior after-tax performance by significantly reducing the tax burden.