As mentioned here, Tax Loss Harvesting (TLH) involves selling tax lots that have declined in value. In a Direct Indexing based TLH method, when a tax lot is sold for a loss, we do not strictly replace a security with another. Instead we construct a factor model of the portfolio, and when selling a security, we try and bring the overall portfolio back in line to it's target factor model weights.

At Double we use a 4 factor model consisting of value, quality, momentum and min_volatility. This is re-calculated regularly based on the covariance between price changes and a daily price change representing those factors.

Lets say you own 100 securities, and 1 one them, called AAA goes down in value 10%. Our optimizer will identify this Loss Harvest opportunity, and determine if it's worth harvesting. If it is, we will

Pairs based TLH strategy has some drawbacks for certain account types, that we try and solve with our Direct Index TLH mode.

For diverse portfolio comprising 100+ securities, there are often not enough replacement stocks that are highly correlated to have a replacement for every thing. This leads to the optimization engine being unable to find a replacement for a given TLH opportunity, and can lead to either capturing the TLH opportunity but staying in cash, or not capturing the TLH opportunity at all. This depends on the entire picture of an account including wash sale, cash on hand vs targets, etc.

* Calculated as the 1 year daily correlation between price changes as or August 8, 2024