Ever hear of too much of a good thing?

Years of strong stock market returns have created an unexpected challenge for advisors using separately managed accounts. It has become harder for direct-indexing strategies to generate the tax losses that underpin much of their appeal, said Eddie Bernhardt, head of SMAs at Invesco. But an innovative strategy is gaining popularity. Maintaining both long and short positions on stocks, opening up additional opportunities to realize tax losses in different market environments.

Here’s how it works: In a rising market, short positions can generate tax-loss harvesting opportunities when those stocks move higher. Conversely, long positions can generate harvestable losses as stock prices decline….