Schwab and Fidelity beat Goldman Sachs to the punch on long/short fund sorcery for RIAs, but the vampire squid is back with its own offer -- a possible one-up

The man-bites-vampire squid story is starting to shift to a more intuitive narrative.

Goldman Sachs is readying a resounding response to Schwab and Fidelity after being caught short with RIAs on the kind of sorcery – long-short funds – for which the New York City investment bank has long been known.

Not only will Goldman offer its own hedge fund-like product, but it will also at least partially leapfrog the No. 1 and No. 2 RIA custodians with an in-house, separately managed account (SMA) “strategy.”

The in-house Goldman Sachs Asset Management (GSAM) strategy includes tax-aware sensibility (e.g. in-house direct indexing) with their long/short hedge fund solutions, according to Brent Sullivan, editor of the "Tax Alpha Insider" newsletter.

Goldman Sachs also clarified that just because it is following mainstream RIA custody competitors' long/short launches, doesn't mean it had anything to learn from them. It was already up to speed in another vertical.

“Our mission is to support independent advisors with industry-leading capabilities," says Jeremy Eisenstein, managing director and head of Goldman Sachs Custody Solutions (GSCS), in an email.

“Just as we’ve done for our institutional clients for many decades, we utilize the depth and breadth of our platform to elevate the service these RIAs are able to provide their clients.”

‘Ticking timebomb’

Though Goldman will collect more of the long/short wallet, it carries increased risk, according to Greg O'Gara, a strategic wealth management advisor.

“Launching a proprietary strategy [means] assuming short-book and performance risk at the manager level, plus the capital and regulatory overhead that comes with it," he says.

“Those are fundamentally different commitments than acting as custodian and lender.”

There are also other reasons these products may be too-good-to-be-true, says Nate Koppikar, cofounder of short-biased hedge fund Orso Partners.

“In an America increasingly attuned to wealth inequality, the discovery that a founder can sell a business for $5 billion and utilize AQR’s loss-generating machine to fully offset the capital gains tax over time – then pass the remaining appreciated portfolio to heirs with a stepped-up basis, effectively reducing the lifetime tax bill to zero – is simply not a sustainable business model,” he told Institutional Investor, Jun. 3.

Koppikar added that long-short SMAs are a "ticking timebomb," bound to attract the ire of regulators for how effectively they shelter gains from capital gains taxes. See: Charles Schwab Corp. touted long-short RIA accounts to Wall Street as a hot new 'win-win' revenue source until geopolitics made it question whether it was ‘growing responsibly’.

Risks, restrictions

For RIAs, the lure is that long-short SMAs give them a double-win in the form of generating both strong returns and a reduced tax bill for their clients. The strategies also help reduce concentration risk in portfolios.

That said, there also is a forbidden fruit aspect to long-short funds: A stock can rise forever, creating unlimited financial risk; the maximum gain is 100%, but losses are mathematically infinite; maintaining a short position requires paying continuous interest fees, and rising prices could force short sellers to buy back stock at a loss. 

It's why Fidelity instituted a blanket ban on new long-short accounts. Fidelity further tightened restrictions and jacked up its fees, from 60 basis points, to 152 basis points in the meantime. Schwab also self-imposed restrictions on their use. 

RIAs custodying with Schwab Advisor Services can invest a maximum of 30% of a client's assets in long-short SMAs, and Schwab has imposed a minimum investment balance of between $1 million and $3 million, depending on the leverage employed – up to a maximum 150% – and a margin debt limit of 100%. See: Fidelity and Schwab embraced long-short SMAs, until surging RIA demand proved too much of a good thing, now they're trying to curb a 'sugar high' among advisors with fee hikes and restrictions that could backfire.

Barring Interactive Brokers, all of the industry's most prominent custodians that support long-short SMAs have imposed restrictions.

Raymond James, Wells Fargo, Apex, and TradePMR, for instance, all operate strict risk modelling and 'dynamic' limits on short trades; and both Altruist and Pershing are still in the process of developing long-short SMA platforms.

Revenue streams

The good news for the RIA custodians is that RIA demand is sky-high, and price sensitivity is low. They can differentiate their offerings in a commodity realm of custody – and collect a rare bounty of high-margin revenues. 

The category has grown this fast because the ROI math is compelling, but also because these are phenomenally profitable and sticky products that the wealth management industry is incentivized to sell. 

Long-short SMA programs – before managing the SMA strategy itself – produce at least eight separate revenue streams including: marketplace fees, lending fees to support shorting securities, trading desk fees, securities lending fees, shelf-space fees (paid by asset managers), payment-for-order-flow fees (paid by market makers), margin lending interest fees, and they also earn on the interest spread due on borrowed cash.

By retail standards, long/short fund fees are astounding. For example, Schwab lists the AQR Long-Short Equity Fund Class fees at 578 basis points compared to the category average of 211 basis points.

Schwab and Fidelity rely on a roster of third-party SMA providers including: AQR, Quantinno, Aperio, Gotham, Brooklyn/Nuveen, Canvas, and others in development. Neither custodian has yet to indicate it's working on a proprietary product.

But Schwab and Fidelity ultimately want to find a way to bring in-house the advisory fees they are currently losing to independent managers, Sullivan says, in an email.

“It's tricky to manage the strategies. It's tricky to custody the strategies,” he says. "But I have to imagine someone internally is considering an in-house solution.

“No one will confirm whether they are or not. Insiders tell me that custodians are not happy to refer business externally for solutions they can not provide.”

Resonating pitch 

Goldman's eagerness to get involved on all sides of the business is also explained by the fact that the long-short SMA business is booming.

“These strategies are growing at eye-popping rates,” says Bob Casey, founder and CEO of RIA Santa Barbara Management, a $530 million in managed assets in Chicago.

“Assets have increased more than tenfold in the last two years, and AQR and Quantinno alone now manage over $100 billion in these products, [which] puts their growth on par with the AI companies dominating the headlines, and makes them some of the fastest-growing financial products of all time,” he writes in an, Apr. 30, Substack post.

To capitalize on the gold rush, Goldman recently launched a GSCS long-short SMA platform, and GSAM long-short portfolios, i.e. SMAs. The potential to leapfrog the custody giants is the inclusion of the latter GSAM product. 

Goldman Sachs will also offer the third-party SMAs in addition to the GSAM product. How those compete with each other remains to be seen, Sullivan says.

“So, it's possible advisors may select GS for their unique take on the strategy.” 

“The implementation is very manager-specific, so I think, if GS is going to attract assets, it has to do so with a pitch that resonates, including things like a different approach to generating pre-tax alpha or superior financing terms or risk management or customer service,” he adds. 

Skewing to Goldman

Goldman's entry into the long-short business is also unlikely to win it assets already custodied at its rivals, says Andrew Besheer, founder and principal of Bronxville, N.Y., consultancy Besheer & Associates, in an email exchange.

Long-short SMAs “make a great deal of sense for [Goldman] from a product expertise perspective … I really don’t see a high likelihood that these are going to cause RIAs to change custodians," he says. 

“They may win on brand or distribution network, but AQR/Quantinno are the household names in this space as of this writing," says Sullivan.

"AQR and Quantinno have built captive client bases likely to persist for decades,” adds Bob Casey, founder and CEO of RIA Santa Barbara Management, a $530 million in managed assets in Chicago.

“Exiting these strategies over a short time frame triggers substantial tax realizations, and the products have already self-selected for families averse to incurring taxes, [so] they are likely to leave them on for the very long run,” he adds. 

Perhaps not, but Goldman is likely to see net-new RIA assets managed by larger, multi-custodial RIAs flow into its coffers, O'Gara counters.

“Fidelity's pause on new long-short SMA accounts and Schwab's tighter leverage tiers and minimums create friction for new business, which should position any custodian still onboarding long-short SMAs, including Goldman, as a beneficiary,” O'Gara explains.

“This is as much about distribution as competition … [but] I'd expect early flows to skew toward new money placed at Goldman,” he adds.

Carving a lane

Though Goldman is last among the three big providers, it may not be least with "something directly in [its] wheelhouse,” says Besheer. 

The one surprise may be the speed at which it reacted, he adds.

“I'm surprised the [rollout] has been slower – or not at all from [some custodians like] Pershing**.

"The complexity of doing the long-short overlay and managing that at scale is what's holding back the expansion of these products, and that gives an edge to someone like GSCS, where the institutional product expertise in the background makes it easier,” Besheer adds.

It's “clearly carving out a lane around the breadth of [its] solutions,” he says.

* Schwab never formally announced a specific date for when it began to support long-short SMAs. Varying reports suggest that it began expanding support for leveraged, third-party SMAs between late 2024 and early 2025. Its 2025 annual report states that it introduced "a modern long/short approach" that year.

** Pershing is in the process of building its own long-short SMA platform for RIAs, according to a March Citywire report.