August 29, 2024 • 27 mins
The idea of using leverage to layer one investment return, say equities, on top of another, say a managed futures strategy, is something institutional investors have been doing for decades under the term “portable alpha.” Now a suite of young, fast-growing exchange-traded funds have come along—they’re called “return stacking” ETFs—and they’re offering such layering to the masses.
On this episode, Joel and Eric speak with Corey Hoffstein, chief executive and chief information officer of Newfound Research and one of the masterminds behind the Return Stacked ETF suite. They discuss how these ETFs work, where they fit in a portfolio and why this is a more responsible use of leverage than the kind that blew up the market in 2008.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:06):
Woko Nu trillions.
Speaker 2 (00:06):
I'm Joel Webber and I'm Eric Belchunis.
Speaker 1 (00:11):
Eric.
Speaker 3 (00:11):
There was a headline from our colleague Blue Wang at
Bloomberg News recently that really caught our attention.
Speaker 1 (00:18):
I'm going to read it to you.
Speaker 3 (00:19):
Levered trade that blew up in two thousand and eight
gets a six hundred million etf redo.
Speaker 1 (00:24):
You love headlines like that, right, Well.
Speaker 2 (00:28):
Look, if you put two thousand and eight and blow
up in a headline, you're gonna get clicks on the
Bloomberg website, There's no doubt and levered for good measure.
That's like a chocolate Sunday with like extra sprinkles and
fudge and maybe some whip cream. Now what's interesting is
I knew what she was talking about as soon as
I saw this headline. And this is return stacking. Now
(00:51):
it's a little bitch.
Speaker 1 (00:52):
Herd that I wasn't actually familiar with.
Speaker 2 (00:55):
Yeah, so the return stacking ETF people I've known over
the years, I've gotten to meet several of the people
behind the two companies that do them, and I got
to tell you, these are some of the smartest people
you'll ever meet. This is like like I was once
playing tennis with this guy in Orlando, and he goes,
you know, Corey Hofstein, that's my JM. This guy like
he's a podcast. That's the smartest guy. So these are
(01:19):
well followed people who would normally be running institutional money
and we'd never hear about them, or we'd hear you
know that in those quarters. But because of the ETF market,
you're getting this kind of this level of intelligence in
these ETFs. And this actual strategy called return stacking used
to be called or still is called portable alpha in
the institutional world. And I remember when I wrote my
(01:41):
first book, the Institutional ETF Toolbox, portable alpha came up
now and then in my conversations with CIOs and whatnot,
and and well we'll save it for the podcast on
what it is, but essentially it is an institutional trade
that is now available to retail.
Speaker 3 (01:56):
And you mentioned someone, Corey Hofstein. He's also going to
be joining us on this episode. He's the chief investment
officer of Newfound Research.
Speaker 1 (02:08):
This time on trillions return stacking. Corey.
Speaker 4 (02:13):
Welcome to Trillions, Joel, Eric, thank you so much for
having me. Really excited to be here.
Speaker 3 (02:18):
Okay, so this article that Luang did generate a ton
of interest, But just break it down.
Speaker 1 (02:24):
What is return stacking?
Speaker 4 (02:27):
Well, return stacking is a phrase that I need to
give all credit to my colleague Rodrigo Gordillo at Resolve
Asset Management for coming up with. The reason most people
haven't heard of it is because it's a new word.
But all return stacking really is is this idea of
taking a return stream of an alternative investment or asset
(02:48):
class or strategy and putting it on top of your
traditional core stocks and bonds. And the idea here is
that we can access diversification or all alternative return streams
without having to sacrifice that core stock and bond exposure
that we normally have to sell to make room in
(03:09):
our portfolio to add those diversifiers. And this isn't a
new idea. This is an idea that goes back to
the nineteen eighties with institutions under the name Portable Alpha.
But as we've brought it to the ETF space and
tried to turn this into a tickorized packaged product, we've
decided to use the label return stacking because we think
it's a little bit more intuitive.
Speaker 3 (03:30):
Can we talk about the two thousand and eight element
to this what went wrong there?
Speaker 1 (03:34):
In what's different now?
Speaker 4 (03:36):
Yeah, So, as the article title did not hide, this
idea uses leverage. Right if you want to add something
on top of your portfolio, you're inherently talking about borrowing
money to do that, and that's leverage and a lot
of people and rightfully so consider it leverage to be dangerous.
If you look at every major financial catastrophe in the
(03:57):
history of markets, leverages normal at the scene of the crime.
But it's not there alone. It's there with its buddies, concentration,
risk and ill liquidity. And so what happened in two
thousand and eight is you had a lot of institutions
adopt this trade and say, you know, it's really hard
for me to beat the market in large cap equities.
(04:18):
And if I look at my policy portfolio, that's the
part of the portfolio that's the biggest. Well, what if
instead of trying to pick stocks, I'll simply replace that
beta with some derivatives like a total return swap or
futures where I don't need one hundred dollars to get
one hundred dollars of SMP exposure. I might only need
ten dollars. I use that leverage, and then I'm going
(04:39):
to take the leftover money, that ninety dollars that's left over,
and I'm going to invest it in some very sexy
hedge fund. And the problem that happened in two thousand
and eight was first that hedge fund, whatever strategy they
were running, wasn't uncorrelated to the market, and so those
strategies ended up sharing a tail risk and blowing up
(04:59):
at the same time. And then two, there was no
way for the institutions to rebalance because a lot of
those hedge funds started throwing up gates and so they
couldn't address the problem, which was as those equities were
selling off, they needed to post more and more margin
as collateral and they couldn't get their money back. And
so yes, leverage was there, but again it was with
this concentration risk and ill liquidity risk that really made
(05:22):
up an issue for leverage. I just the last thing
I'll add is I want to contrast that with someone
like Bridgewater, very famous hedge fund, who famously uses a
whole lot of leverage in their portfolio construction. But they
use leverage for defense, for adding more diversification, and they
were able to sail through two thousand and eight. Just fine, and.
Speaker 2 (05:43):
Let's go through this fund piece by piece here. So
the flagship fund that you guys run is return stacked
US stocks and managed futures etf tickers are sst Just
walk us through how you do it. So it sounds
like you get the US stock exposure through a futures
(06:03):
or a swap, but you have to post some kind
of a collateral, and that would mean treasury. So you're
on the hook for four or five percent interest rate, right,
and then you with the money you still have left
over since you borrow that, you go and do a
managed future strategy?
Speaker 1 (06:19):
Is that about right?
Speaker 4 (06:21):
It's about right? But I actually I think it's easier
to understand and reverse. Right. So what is a managed
future strategy? Really quickly for those who don't know, it's
a trading strategy that's going to trade commodities, currencies, equities,
and bonds long and short based upon different trading signals.
And the biggest signal that's uses trend following, and typically
you're trading futures, hence the name managed futures. Now, when
(06:44):
you give a dollar to a traditional managed future strategy,
what they're going to do is they're going to take
that dollar and invest it in TE bills and use
those T bills as collateral to run their trading strategy.
All we're really doing with RSST is saying, well, when
you give a dollar, instead of putting it in T bills,
what if we put it in the SMP five hundred
(07:04):
or generic large cap equities instead of T bills and
then run the trading strategy on top. And now there's
there's some minution how much how we get that exposure.
So for example, well, if you give us a dollar,
we'll buy seventy five cents of large cap equity exposure
through the underlying stocks or an ETF. We'll put the
rest in T bills as collateral, We'll buy some SMP
(07:26):
futures to true up that full exposure to S and
P five hundred, and then we'll use that collateral also
to do the trading strategy. But I like to think
of it as in reverse. Instead of thinking about all
these building blocks on top of each other, it's just
we're giving you a traditional managed futures fund. Just instead
of holding T bills, we're holding large cap equities.
Speaker 2 (07:46):
Okay, And so when we go over that managed future strategy.
And this is I think part of the worry about
and what you mentioned two thousand and eight is that
in a panic, a lot of times correlations converge to one.
Everything is just being sold in all that math you had,
and then the historical data goes out the window. Your
(08:07):
managed futures has a short position, so in a sell off,
you're at least going to have the shorts go up. Right.
Is that the idea behind why it's a little different
than say a hedge fund in two thousand and eight,
which might have been all long and thus not really
a hedge fund.
Speaker 1 (08:25):
Yeah.
Speaker 4 (08:25):
I mean, look, leverage amplifies the good and the bad, right,
And so the reason we like manage futures and we're
I don't want to say prescriptive about what you should
be stacking on top, but we have strong opinions is
that we're looking for strategies that are ideally uncorrelated to
the things that are already in the portfolio, like large
(08:45):
cap equities or bonds or whatever else people typically hold
in their strategic allocation. That's not to say you can't
see managed futures and equities fall at the same time.
I think we just saw that late July early ONGUS
were managed future strategies. We're riding the trends of equities.
They were short the Japanese yend because that was a
(09:07):
trade that was paying off, and as that carry trade
blew up, managed future strategies went down at the same
time as equities, and you would see in our ETF
that we lost more money than if you had just
held equities alone. In fact, if we look at this
sort of trade equities plus managed futures on top on average,
(09:27):
the draw down is going to be larger every single
year than just equities alone. But it's in those bigger
draw downs like two thousand and eight or the early
two thousands that you see strategies like managed futures start
to adapt and as equities sell off, they might suddenly
go short equities and long bonds and short commodities and
(09:49):
long the US dollar, and all of a sudden have
the flexibility to start to create positive returns in those
crisis periods. And that's where we think that diversification over
time is really valuable.
Speaker 3 (10:08):
Corey, you guys launched about a year ago. I'm curious
what have you learned so far and how might that
inform what happens going forward with the products.
Speaker 4 (10:17):
I think the biggest lessons we've learned and trying to
bring this entire suite to market is how important it
is to think of these things as building blocks.
Speaker 1 (10:26):
Right.
Speaker 4 (10:26):
So when we talk about RSST here, what we're talking
about is every dollar you give us, we're going to
give you a dollar of large cap equity plus a
dollar of managed futures exposure. We're not saying that that
is the optimal combination of equities and managed futures. There
might be some mathematically better combination. But by providing just
that dollar for dollar, we're trying to make it as
(10:48):
transparent and easy to use for smaller institutions and financial
advisors as a as a lego or building block in
their portfolio. And I think I underappreciate to personally that
flexibility that it provides allocators by keeping the products simpler,
and rather than trying to bring the most optimal product
(11:08):
to market, bringing a product that's more transparent, easier to understand,
and serves as a building block allows allocators to use
it in a variety of flexible manners.
Speaker 3 (11:19):
So talk to us more about the suite. What is
this suite of products? And how might investors try and
use them together.
Speaker 4 (11:26):
Yeah, So we launched our first product back in February
twenty twenty three. We now have five ETFs out the
door and have raised just over seven hundred and fifty
million in assets in the suite sense then, and we'll
hopefully have a sixth product out the door by the
end of the year. And there's of the five products,
we have a the one we've been talking about, which
(11:48):
is our Stocks and Managed Futures that has a sister
fund which is a bonds in managed futures. Same concept.
Give it a dollar, it's going to get a dollar
of core US fixed income plus a dollar managed futures
on top. Then we have our stocks and Futures Yield,
This is another futures trading strategy, but instead of using
trend as the signal, it's using carry as the signal,
(12:11):
another very popular global macro type trade. We then have
a bonds plus futures yield, so again a sister fund there,
which we just launched last week. And then we have
a Global Stocks and Bonds ETF, which really isn't meant
to be a stacking solution in the same sense, where
we're adding an overlay to a portfolio, but meant to
be used as a capital efficiency tool that anyone can
(12:35):
effectively use it to free up room in their portfolio
and then effectively stack whatever they want on their portfolio.
Very much and to choose your own adventure sense.
Speaker 2 (12:46):
And if I'm a sixty forty investor, a lot of
advisors are, which is the prominent consumer of ETFs. What
am I selling to buy this? What part of the
portfolio would I be you know, allocating this too?
Speaker 4 (13:02):
You know, Eric, that's actually the fundamental problem we're trying
to solve in what we're doing, right, because traditionally with alternatives,
diversification is this process of addition through subtraction. If I
like managed futures because it's uncorrelated to stocks and bonds,
I need to figure out how to make room in
my portfolio, which often means selling stocks and bonds. So
(13:23):
if you look at say the performance of managed futures
versus the SMP since we launched r SST last November,
the SMP's up north of twenty five percent and managed
futures are flat over that period. And so that is
a at least over this period, right, has been a
very expensive opportunity cost. The idea of a product like
(13:44):
RSST is you can sell your equities and buy RSST
and you are getting your equities back and overlaying the
managed futures on top, and so you don't have to
sacrifice that exposure. And again that goes back to debt.
To my answer to you, Joel, about what we learned
the simple building blocks. By having stocks plus managed futures
(14:04):
or bonds plus managed futures, or stocks plus futures yield
or bonds plus futures yield as individual building block products,
it makes it very easy for the advisor or allocator
to figure out what to sell and how to replace
that underlying exposure to then create the overlight to the
alternative strategy they want.
Speaker 2 (14:23):
All right, and Corey, you know we talked about the
users of ETFs so prodmintly advisors and I get this
as a something they can use. What about institutions, because
you know, I always find that interesting. You know, you've
got someone like yourself, you clearly you know, and Rodrigo
could be institutional money managers. You could have a hedge fund.
(14:45):
So your caliber is that of an institutional manager. Is
there any interest from them on this, Like you know,
Simplify has had some institutional bites. Some of their funds
have like pensions and endowments.
Speaker 1 (14:58):
It's tough though.
Speaker 2 (14:59):
I think institutions sometimes want the private private fund they
don't want it through an ETF for some reason. But
these all these like Simplifies products seem like something that
maybe you could even coax a institution to buy.
Speaker 4 (15:12):
So this is again a trade that came from the
institutional space. So a lot of larger institutions are already
doing this and so they don't need the products that
we put together. That said, what where we are getting
inbound interest is from smaller institutions who don't have the
infrastructure to set up this trade and want to be
(15:34):
able to access it the way their larger siblings are
doing it, as well as ex institutional money managers who
are now running model portfolios. And I know this is
a space you've both looked at a lot, but model
portfolios of for financial advisors of space that's grown dramatically.
There's a lot of ex institutional money managers that are
(15:56):
now overseeing those models, and we are seeing not only
allocation in that space, but a tremendous amount of interest I'm.
Speaker 3 (16:03):
Actually curious about the institutional investor approach to this versus
the approach that you guys have brought to market as
an ETF. What's different still about what the institutions are
doing than what you all have.
Speaker 4 (16:16):
Well, the big difference is really just the package. What
the institutions are doing is they're able to work with
a large institutional asset manager to open up separately managed accounts,
have their derivatives managed in that separately managed account. Then
they can go choose whatever hedge fund strategy they want,
(16:37):
whatever manager they want to allocate to, to overlight to
create that portable alpha overlay. We're providing more defined building blocks. Right,
Our US equity plus managed future strategy is our managed
future strategy. It's entirely possible that an allocator likes the
(16:58):
concept but doesn't like the way we do the trades.
The larger institutions can go out and source wherever they
want on the hedgehunt side, so it's a lot more
flexibility for them. But again with that flexibility comes a
lot more operational burden, a lot more manager due diligence.
What we're trying to do is put it into a single,
easy to access trade.
Speaker 2 (17:20):
And it's interesting. I've known you for quite a while
and I've known Rodrigo as well. I know him as
this sort of risk weighted ETF person and fun person,
and I always thought of you as a quant you know,
sort of like Wes Gray or Cliff Fastness. And when
did you come up with this? You know, you have
this other ETF romo which I don't is not totally
(17:43):
related to this suite of products. I always find that
interesting somebody who has had a couple ETFs here and there,
and then they sort of lock into something that gets
some grassroots interest and they just run with it. It's like,
you know, like your third album was the successful one?
Is that sort of how this feels? And how did
you get into this versus just doing more quant based investing?
Speaker 4 (18:07):
In some ways yes, in some ways no. This idea
of capital efficiency and portable alpha is something that Resolve
has been doing internally a long time, because that's how
you build a risk balanced portfolio. In my firm, Newfound,
we started implementing it in our mandates back in twenty seventeen,
but what we didn't do is put it out in
(18:28):
an ETF. And I think the common frustration both Newfound
and Resolve had, and the problem we were ultimately trying
to solve was that we both were large proponents of
alternative diversification in an era the twenty tens where that
was just a hard concept to continue to try to
convince people to allocate to. Again, it goes back to
(18:49):
this problem of diversification is typically addition through subtraction. I
need to tell someone to sell stocks and bonds to
make room for alternatives in a decade that you couldn't
have done better than just passive US sixty forty, right,
And so that was a very hard trade to convince
people to move out of. This evolution isn't an evolution
of thinking so much as an evolution of delivery of
(19:11):
us saying well, this might be a better way for
people to get their alternatives and be able to stick
with them, right, because by packaging them in this way
and not forcing people to get rid of their stocks
and bonds, it might be easier for people to hold
alternatives during those periods where alternatives are underperforming stocks and bonds,
so that they can have them in years like twenty
(19:31):
twenty two and they're not selling out of them and
making all these wrong sort of market timing decisions.
Speaker 1 (19:44):
I want to ask about performance.
Speaker 3 (19:46):
How do you feel about how things have gone so
far and what scenario is the one that you feel
like you need to really feel like you're going to
break through and have people really know that this is
a winning strategy.
Speaker 4 (20:00):
Yeah, so with five ETFs, right, it's going to differ.
But I'll talk about our flagship RSST, and I think
from a target perspective, we have done and delivered exactly
as we said we would over the last year. If
you decompose our returns, we have almost perfectly delivered, providing
the S and P five hundred plus category average returns
(20:23):
of managed futures. And that's what we're trying to do
is give you the beta of the managed futures category,
and so we are very very happy with the return
we've generated. That said, managed futures as a strategy has
had a negative return over the last year, and so
if you compare us versus buy and hold equities, we
will have underperformed. But again, what I would go back
to is saying, Okay, the SMP's up twenty eight percent,
(20:46):
we're up close to twenty. Managed futures as a category
is flat to negative and so okay, we're we're lagging
behind the SMP because we overlaid that negative return. I
think that's a lot better than if you had sold
the SMP to buy managed futures and now you're lagging
behind by thirty six percent, right, And so I think
we prove in the point, which is, okay, we can
(21:08):
add the diversification without creating this huge hurdle that is
the opportunity cost of trying to fight against markets just
marching higher over the long run.
Speaker 1 (21:19):
Yeah.
Speaker 2 (21:19):
And is it tempting in the managed future strategy when
the markets are going up and we think the Fed's
gonna cut everything seems pretty good right now to maintain
the short position, because I remember looking at charts of
hedge funds over the years, and when the bull market
of the twenty tens was going on, I think a
(21:39):
lot of them started to just merge into long only.
They if they didn't, they were losing assets, and so
the market kind of dictated they just go long only.
How much are you strict with yourself to keep the
short position in the managed futures incredibly strict.
Speaker 4 (21:57):
I mean, we run it in a purely systematic manner
and again, the idea with trend is that if equities
are going up, our trend following strategy should start adding
positively to equities. But it's not just trading equities. It's
trading currencies and commodities and bonds. And so if we
say rewind the clock to April, which was another little
bit of a jostle for equities, we saw that even
(22:20):
though the trend program was long equities and was losing
money in those long equity positions, that was offset by
you know, shorts in currencies and longs in commodities and
shorts and bonds, and so you know, the very nature
here is we think these are long term strategies that
are uncorrelated to each other. We think over the long
run both are going to create positive returns, and so
(22:42):
we think they're better stacked. The short run, right, is
another matter entirely. Just as stocks can have a year
where they're down, we expect maned futures to have a
year that it's down. But as long as we systematically
stick to that trend following strategy, we think it's long term,
very additive to the portfolio.
Speaker 2 (22:59):
It's interesting, I notice this huge rush of ETFs that
protect your downside a little bit, if not completely. The
buffer ETFs and also the covered call strategies, it almost
seems like this managed futures return stacking ETF could compete
with those in that if you do stick to the
shorts being in there, that when the market does sell off,
(23:21):
it will have somewhat of a buffer effect in the portfolio.
And just seems like there's a huge market for that.
Is that, I mean, I guess that's the biggest one.
Is that part of the reason why that one sold
the best?
Speaker 4 (23:34):
I think so. And these stats actually I think come
from York and these blew my mind as there's over
fifty billion in those buffered ETFs. Yeah, that launched what
five years ago, and over fifty percent of ETFs launched
year to date include derivatives in them, which I think
is a big change. So it really speaks to the
changing market environment and what people are looking for in
(23:54):
an allocation product. Short answers, Yes, right, those buffered products
are going to use options to try to explicitly manage
your downside risk, whereas what we're trying to do, which
comes at a cost. Right, if you're buying insurance, there's
a cost to insurance. What we're trying to do is
say we're not contractually hedging downside risk. What we're trying
to do is add an alternative investment strategy that we
(24:17):
think generates positive long term returns and has really attractive
diversification properties to your portfolio. And in doing so, not
only do we think we can outperform over the long run,
right that portable alpha create those excess returns, but you know,
we think there's a strong probability that in those large
draw down environments, those big macroeconomic shocks twenty twenty two,
(24:40):
A two thousand and eight, in early two thousands, these
are the sort of strategies that can adapt and have
the flexibility and the breadth of assets that they're trading
to create a positive return and hopefully offset some of
those losses in either the underlying stocks or bonds.
Speaker 3 (24:54):
Corey, I'm curious where else do you think you can
take the strategy you mentioned you've got one more product
that you can add to the suite.
Speaker 1 (25:00):
Is that is that it and then you grow the
AUM from there?
Speaker 3 (25:03):
Or do you think that there might be more opportunities
to grow the number of offerings you guys have.
Speaker 4 (25:08):
I think going back to the idea that we want
this to be legos in building blocks for allocators. There's
a number of combinations we can start to build, right,
So we're looking towards the end of the year to
launch a bonds plus merger arbitrage strategy. But I think
you can still even look towards more vanilla combinations like
stocks plus commodities, bonds plus gold. I'm sure we could
(25:30):
look at something like stocks plus bitcoin, right, not appealing
to everyone, But as we continue to build the suite
out and think about these different combinations of both passive
and active diversifiers, I don't want to say there's unlimited combinations,
but there's certainly a large, fat tail of combinations. What
we're trying to do with the first call it six
(25:53):
to nine products is really make sure we hit the
big trends that people are looking for, both the big
underlying assets well as the big diversifiers. And then as
we get towards products ten to fifteen, I think you'll
start to see sort of a less appetite for the
specific implementation as we sort of slice and dice the
market a little bit.
Speaker 1 (26:11):
Dinner.
Speaker 3 (26:12):
Okay, last question, favorite ETF ticker other than your own.
Speaker 4 (26:18):
It's now defunct, unfortunately. Let's okay at cy CYA and
why that one from Simplify. It was a tail hedging ETF.
And this is not a commentary on the product itself,
but CYA standing for cover your Ass. And I thought
that was a pretty clever ticker.
Speaker 1 (26:37):
Yeah, yeah, that.
Speaker 3 (26:39):
Is pretty good.
Speaker 1 (26:39):
That's a good one.
Speaker 2 (26:40):
That's that's never been used before.
Speaker 1 (26:44):
I know that ETF.
Speaker 2 (26:46):
I thought this, you know, I thought it was a
great ticker when it came out. Good one man, pretty inspired.
Although I know you're kind of friendly with them, and
that's sort of your your.
Speaker 4 (26:55):
World if I try to keep my fingers on the
pulse of the market to okay, I follow you, so
I see what's getting launched.
Speaker 1 (27:02):
All right, Corey Hofsen, thanks so much for joining us
on Trillions.
Speaker 4 (27:05):
Thank you guys.
Speaker 3 (27:12):
Thanks for listening to Trillions.
Speaker 4 (27:14):
Until next time.
Speaker 3 (27:15):
You can find us on the Bloomberg Terminal, Bloomberg dot com,
Apple Podcasts, Spotify, or wherever else you'd like to listen.
We'd love to hear from you. We're on Twitter. I'm
at Joel Webber Show. He's at Eric Baulchunas. This episode
of Trillions was produced by Magnus Hendrickson.
Speaker 1 (27:33):
Bye
Woko Nu trillions.
Speaker 2 (00:06):
I'm Joel Webber and I'm Eric Belchunis.
Speaker 1 (00:11):
Eric.
Speaker 3 (00:11):
There was a headline from our colleague Blue Wang at
Bloomberg News recently that really caught our attention.
Speaker 1 (00:18):
I'm going to read it to you.
Speaker 3 (00:19):
Levered trade that blew up in two thousand and eight
gets a six hundred million etf redo.
Speaker 1 (00:24):
You love headlines like that, right, Well.
Speaker 2 (00:28):
Look, if you put two thousand and eight and blow
up in a headline, you're gonna get clicks on the
Bloomberg website, There's no doubt and levered for good measure.
That's like a chocolate Sunday with like extra sprinkles and
fudge and maybe some whip cream. Now what's interesting is
I knew what she was talking about as soon as
I saw this headline. And this is return stacking. Now
(00:51):
it's a little bitch.
Speaker 1 (00:52):
Herd that I wasn't actually familiar with.
Speaker 2 (00:55):
Yeah, so the return stacking ETF people I've known over
the years, I've gotten to meet several of the people
behind the two companies that do them, and I got
to tell you, these are some of the smartest people
you'll ever meet. This is like like I was once
playing tennis with this guy in Orlando, and he goes,
you know, Corey Hofstein, that's my JM. This guy like
he's a podcast. That's the smartest guy. So these are
(01:19):
well followed people who would normally be running institutional money
and we'd never hear about them, or we'd hear you
know that in those quarters. But because of the ETF market,
you're getting this kind of this level of intelligence in
these ETFs. And this actual strategy called return stacking used
to be called or still is called portable alpha in
the institutional world. And I remember when I wrote my
(01:41):
first book, the Institutional ETF Toolbox, portable alpha came up
now and then in my conversations with CIOs and whatnot,
and and well we'll save it for the podcast on
what it is, but essentially it is an institutional trade
that is now available to retail.
Speaker 3 (01:56):
And you mentioned someone, Corey Hofstein. He's also going to
be joining us on this episode. He's the chief investment
officer of Newfound Research.
Speaker 1 (02:08):
This time on trillions return stacking. Corey.
Speaker 4 (02:13):
Welcome to Trillions, Joel, Eric, thank you so much for
having me. Really excited to be here.
Speaker 3 (02:18):
Okay, so this article that Luang did generate a ton
of interest, But just break it down.
Speaker 1 (02:24):
What is return stacking?
Speaker 4 (02:27):
Well, return stacking is a phrase that I need to
give all credit to my colleague Rodrigo Gordillo at Resolve
Asset Management for coming up with. The reason most people
haven't heard of it is because it's a new word.
But all return stacking really is is this idea of
taking a return stream of an alternative investment or asset
(02:48):
class or strategy and putting it on top of your
traditional core stocks and bonds. And the idea here is
that we can access diversification or all alternative return streams
without having to sacrifice that core stock and bond exposure
that we normally have to sell to make room in
(03:09):
our portfolio to add those diversifiers. And this isn't a
new idea. This is an idea that goes back to
the nineteen eighties with institutions under the name Portable Alpha.
But as we've brought it to the ETF space and
tried to turn this into a tickorized packaged product, we've
decided to use the label return stacking because we think
it's a little bit more intuitive.
Speaker 3 (03:30):
Can we talk about the two thousand and eight element
to this what went wrong there?
Speaker 1 (03:34):
In what's different now?
Speaker 4 (03:36):
Yeah, So, as the article title did not hide, this
idea uses leverage. Right if you want to add something
on top of your portfolio, you're inherently talking about borrowing
money to do that, and that's leverage and a lot
of people and rightfully so consider it leverage to be dangerous.
If you look at every major financial catastrophe in the
(03:57):
history of markets, leverages normal at the scene of the crime.
But it's not there alone. It's there with its buddies, concentration,
risk and ill liquidity. And so what happened in two
thousand and eight is you had a lot of institutions
adopt this trade and say, you know, it's really hard
for me to beat the market in large cap equities.
(04:18):
And if I look at my policy portfolio, that's the
part of the portfolio that's the biggest. Well, what if
instead of trying to pick stocks, I'll simply replace that
beta with some derivatives like a total return swap or
futures where I don't need one hundred dollars to get
one hundred dollars of SMP exposure. I might only need
ten dollars. I use that leverage, and then I'm going
(04:39):
to take the leftover money, that ninety dollars that's left over,
and I'm going to invest it in some very sexy
hedge fund. And the problem that happened in two thousand
and eight was first that hedge fund, whatever strategy they
were running, wasn't uncorrelated to the market, and so those
strategies ended up sharing a tail risk and blowing up
(04:59):
at the same time. And then two, there was no
way for the institutions to rebalance because a lot of
those hedge funds started throwing up gates and so they
couldn't address the problem, which was as those equities were
selling off, they needed to post more and more margin
as collateral and they couldn't get their money back. And
so yes, leverage was there, but again it was with
this concentration risk and ill liquidity risk that really made
(05:22):
up an issue for leverage. I just the last thing
I'll add is I want to contrast that with someone
like Bridgewater, very famous hedge fund, who famously uses a
whole lot of leverage in their portfolio construction. But they
use leverage for defense, for adding more diversification, and they
were able to sail through two thousand and eight. Just fine, and.
Speaker 2 (05:43):
Let's go through this fund piece by piece here. So
the flagship fund that you guys run is return stacked
US stocks and managed futures etf tickers are sst Just
walk us through how you do it. So it sounds
like you get the US stock exposure through a futures
(06:03):
or a swap, but you have to post some kind
of a collateral, and that would mean treasury. So you're
on the hook for four or five percent interest rate, right,
and then you with the money you still have left
over since you borrow that, you go and do a
managed future strategy?
Speaker 1 (06:19):
Is that about right?
Speaker 4 (06:21):
It's about right? But I actually I think it's easier
to understand and reverse. Right. So what is a managed
future strategy? Really quickly for those who don't know, it's
a trading strategy that's going to trade commodities, currencies, equities,
and bonds long and short based upon different trading signals.
And the biggest signal that's uses trend following, and typically
you're trading futures, hence the name managed futures. Now, when
(06:44):
you give a dollar to a traditional managed future strategy,
what they're going to do is they're going to take
that dollar and invest it in TE bills and use
those T bills as collateral to run their trading strategy.
All we're really doing with RSST is saying, well, when
you give a dollar, instead of putting it in T bills,
what if we put it in the SMP five hundred
(07:04):
or generic large cap equities instead of T bills and
then run the trading strategy on top. And now there's
there's some minution how much how we get that exposure.
So for example, well, if you give us a dollar,
we'll buy seventy five cents of large cap equity exposure
through the underlying stocks or an ETF. We'll put the
rest in T bills as collateral, We'll buy some SMP
(07:26):
futures to true up that full exposure to S and
P five hundred, and then we'll use that collateral also
to do the trading strategy. But I like to think
of it as in reverse. Instead of thinking about all
these building blocks on top of each other, it's just
we're giving you a traditional managed futures fund. Just instead
of holding T bills, we're holding large cap equities.
Speaker 2 (07:46):
Okay, And so when we go over that managed future strategy.
And this is I think part of the worry about
and what you mentioned two thousand and eight is that
in a panic, a lot of times correlations converge to one.
Everything is just being sold in all that math you had,
and then the historical data goes out the window. Your
(08:07):
managed futures has a short position, so in a sell off,
you're at least going to have the shorts go up. Right.
Is that the idea behind why it's a little different
than say a hedge fund in two thousand and eight,
which might have been all long and thus not really
a hedge fund.
Speaker 1 (08:25):
Yeah.
Speaker 4 (08:25):
I mean, look, leverage amplifies the good and the bad, right,
And so the reason we like manage futures and we're
I don't want to say prescriptive about what you should
be stacking on top, but we have strong opinions is
that we're looking for strategies that are ideally uncorrelated to
the things that are already in the portfolio, like large
(08:45):
cap equities or bonds or whatever else people typically hold
in their strategic allocation. That's not to say you can't
see managed futures and equities fall at the same time.
I think we just saw that late July early ONGUS
were managed future strategies. We're riding the trends of equities.
They were short the Japanese yend because that was a
(09:07):
trade that was paying off, and as that carry trade
blew up, managed future strategies went down at the same
time as equities, and you would see in our ETF
that we lost more money than if you had just
held equities alone. In fact, if we look at this
sort of trade equities plus managed futures on top on average,
(09:27):
the draw down is going to be larger every single
year than just equities alone. But it's in those bigger
draw downs like two thousand and eight or the early
two thousands that you see strategies like managed futures start
to adapt and as equities sell off, they might suddenly
go short equities and long bonds and short commodities and
(09:49):
long the US dollar, and all of a sudden have
the flexibility to start to create positive returns in those
crisis periods. And that's where we think that diversification over
time is really valuable.
Speaker 3 (10:08):
Corey, you guys launched about a year ago. I'm curious
what have you learned so far and how might that
inform what happens going forward with the products.
Speaker 4 (10:17):
I think the biggest lessons we've learned and trying to
bring this entire suite to market is how important it
is to think of these things as building blocks.
Speaker 1 (10:26):
Right.
Speaker 4 (10:26):
So when we talk about RSST here, what we're talking
about is every dollar you give us, we're going to
give you a dollar of large cap equity plus a
dollar of managed futures exposure. We're not saying that that
is the optimal combination of equities and managed futures. There
might be some mathematically better combination. But by providing just
that dollar for dollar, we're trying to make it as
(10:48):
transparent and easy to use for smaller institutions and financial
advisors as a as a lego or building block in
their portfolio. And I think I underappreciate to personally that
flexibility that it provides allocators by keeping the products simpler,
and rather than trying to bring the most optimal product
(11:08):
to market, bringing a product that's more transparent, easier to understand,
and serves as a building block allows allocators to use
it in a variety of flexible manners.
Speaker 3 (11:19):
So talk to us more about the suite. What is
this suite of products? And how might investors try and
use them together.
Speaker 4 (11:26):
Yeah, So we launched our first product back in February
twenty twenty three. We now have five ETFs out the
door and have raised just over seven hundred and fifty
million in assets in the suite sense then, and we'll
hopefully have a sixth product out the door by the
end of the year. And there's of the five products,
we have a the one we've been talking about, which
(11:48):
is our Stocks and Managed Futures that has a sister
fund which is a bonds in managed futures. Same concept.
Give it a dollar, it's going to get a dollar
of core US fixed income plus a dollar managed futures
on top. Then we have our stocks and Futures Yield,
This is another futures trading strategy, but instead of using
trend as the signal, it's using carry as the signal,
(12:11):
another very popular global macro type trade. We then have
a bonds plus futures yield, so again a sister fund there,
which we just launched last week. And then we have
a Global Stocks and Bonds ETF, which really isn't meant
to be a stacking solution in the same sense, where
we're adding an overlay to a portfolio, but meant to
be used as a capital efficiency tool that anyone can
(12:35):
effectively use it to free up room in their portfolio
and then effectively stack whatever they want on their portfolio.
Very much and to choose your own adventure sense.
Speaker 2 (12:46):
And if I'm a sixty forty investor, a lot of
advisors are, which is the prominent consumer of ETFs. What
am I selling to buy this? What part of the
portfolio would I be you know, allocating this too?
Speaker 4 (13:02):
You know, Eric, that's actually the fundamental problem we're trying
to solve in what we're doing, right, because traditionally with alternatives,
diversification is this process of addition through subtraction. If I
like managed futures because it's uncorrelated to stocks and bonds,
I need to figure out how to make room in
my portfolio, which often means selling stocks and bonds. So
(13:23):
if you look at say the performance of managed futures
versus the SMP since we launched r SST last November,
the SMP's up north of twenty five percent and managed
futures are flat over that period. And so that is
a at least over this period, right, has been a
very expensive opportunity cost. The idea of a product like
(13:44):
RSST is you can sell your equities and buy RSST
and you are getting your equities back and overlaying the
managed futures on top, and so you don't have to
sacrifice that exposure. And again that goes back to debt.
To my answer to you, Joel, about what we learned
the simple building blocks. By having stocks plus managed futures
(14:04):
or bonds plus managed futures, or stocks plus futures yield
or bonds plus futures yield as individual building block products,
it makes it very easy for the advisor or allocator
to figure out what to sell and how to replace
that underlying exposure to then create the overlight to the
alternative strategy they want.
Speaker 2 (14:23):
All right, and Corey, you know we talked about the
users of ETFs so prodmintly advisors and I get this
as a something they can use. What about institutions, because
you know, I always find that interesting. You know, you've
got someone like yourself, you clearly you know, and Rodrigo
could be institutional money managers. You could have a hedge fund.
(14:45):
So your caliber is that of an institutional manager. Is
there any interest from them on this, Like you know,
Simplify has had some institutional bites. Some of their funds
have like pensions and endowments.
Speaker 1 (14:58):
It's tough though.
Speaker 2 (14:59):
I think institutions sometimes want the private private fund they
don't want it through an ETF for some reason. But
these all these like Simplifies products seem like something that
maybe you could even coax a institution to buy.
Speaker 4 (15:12):
So this is again a trade that came from the
institutional space. So a lot of larger institutions are already
doing this and so they don't need the products that
we put together. That said, what where we are getting
inbound interest is from smaller institutions who don't have the
infrastructure to set up this trade and want to be
(15:34):
able to access it the way their larger siblings are
doing it, as well as ex institutional money managers who
are now running model portfolios. And I know this is
a space you've both looked at a lot, but model
portfolios of for financial advisors of space that's grown dramatically.
There's a lot of ex institutional money managers that are
(15:56):
now overseeing those models, and we are seeing not only
allocation in that space, but a tremendous amount of interest I'm.
Speaker 3 (16:03):
Actually curious about the institutional investor approach to this versus
the approach that you guys have brought to market as
an ETF. What's different still about what the institutions are
doing than what you all have.
Speaker 4 (16:16):
Well, the big difference is really just the package. What
the institutions are doing is they're able to work with
a large institutional asset manager to open up separately managed accounts,
have their derivatives managed in that separately managed account. Then
they can go choose whatever hedge fund strategy they want,
(16:37):
whatever manager they want to allocate to, to overlight to
create that portable alpha overlay. We're providing more defined building blocks. Right,
Our US equity plus managed future strategy is our managed
future strategy. It's entirely possible that an allocator likes the
(16:58):
concept but doesn't like the way we do the trades.
The larger institutions can go out and source wherever they
want on the hedgehunt side, so it's a lot more
flexibility for them. But again with that flexibility comes a
lot more operational burden, a lot more manager due diligence.
What we're trying to do is put it into a single,
easy to access trade.
Speaker 2 (17:20):
And it's interesting. I've known you for quite a while
and I've known Rodrigo as well. I know him as
this sort of risk weighted ETF person and fun person,
and I always thought of you as a quant you know,
sort of like Wes Gray or Cliff Fastness. And when
did you come up with this? You know, you have
this other ETF romo which I don't is not totally
(17:43):
related to this suite of products. I always find that
interesting somebody who has had a couple ETFs here and there,
and then they sort of lock into something that gets
some grassroots interest and they just run with it. It's like,
you know, like your third album was the successful one?
Is that sort of how this feels? And how did
you get into this versus just doing more quant based investing?
Speaker 4 (18:07):
In some ways yes, in some ways no. This idea
of capital efficiency and portable alpha is something that Resolve
has been doing internally a long time, because that's how
you build a risk balanced portfolio. In my firm, Newfound,
we started implementing it in our mandates back in twenty seventeen,
but what we didn't do is put it out in
(18:28):
an ETF. And I think the common frustration both Newfound
and Resolve had, and the problem we were ultimately trying
to solve was that we both were large proponents of
alternative diversification in an era the twenty tens where that
was just a hard concept to continue to try to
convince people to allocate to. Again, it goes back to
(18:49):
this problem of diversification is typically addition through subtraction. I
need to tell someone to sell stocks and bonds to
make room for alternatives in a decade that you couldn't
have done better than just passive US sixty forty, right,
And so that was a very hard trade to convince
people to move out of. This evolution isn't an evolution
of thinking so much as an evolution of delivery of
(19:11):
us saying well, this might be a better way for
people to get their alternatives and be able to stick
with them, right, because by packaging them in this way
and not forcing people to get rid of their stocks
and bonds, it might be easier for people to hold
alternatives during those periods where alternatives are underperforming stocks and bonds,
so that they can have them in years like twenty
(19:31):
twenty two and they're not selling out of them and
making all these wrong sort of market timing decisions.
Speaker 1 (19:44):
I want to ask about performance.
Speaker 3 (19:46):
How do you feel about how things have gone so
far and what scenario is the one that you feel
like you need to really feel like you're going to
break through and have people really know that this is
a winning strategy.
Speaker 4 (20:00):
Yeah, so with five ETFs, right, it's going to differ.
But I'll talk about our flagship RSST, and I think
from a target perspective, we have done and delivered exactly
as we said we would over the last year. If
you decompose our returns, we have almost perfectly delivered, providing
the S and P five hundred plus category average returns
(20:23):
of managed futures. And that's what we're trying to do
is give you the beta of the managed futures category,
and so we are very very happy with the return
we've generated. That said, managed futures as a strategy has
had a negative return over the last year, and so
if you compare us versus buy and hold equities, we
will have underperformed. But again, what I would go back
to is saying, Okay, the SMP's up twenty eight percent,
(20:46):
we're up close to twenty. Managed futures as a category
is flat to negative and so okay, we're we're lagging
behind the SMP because we overlaid that negative return. I
think that's a lot better than if you had sold
the SMP to buy managed futures and now you're lagging
behind by thirty six percent, right, And so I think
we prove in the point, which is, okay, we can
(21:08):
add the diversification without creating this huge hurdle that is
the opportunity cost of trying to fight against markets just
marching higher over the long run.
Speaker 1 (21:19):
Yeah.
Speaker 2 (21:19):
And is it tempting in the managed future strategy when
the markets are going up and we think the Fed's
gonna cut everything seems pretty good right now to maintain
the short position, because I remember looking at charts of
hedge funds over the years, and when the bull market
of the twenty tens was going on, I think a
(21:39):
lot of them started to just merge into long only.
They if they didn't, they were losing assets, and so
the market kind of dictated they just go long only.
How much are you strict with yourself to keep the
short position in the managed futures incredibly strict.
Speaker 4 (21:57):
I mean, we run it in a purely systematic manner
and again, the idea with trend is that if equities
are going up, our trend following strategy should start adding
positively to equities. But it's not just trading equities. It's
trading currencies and commodities and bonds. And so if we
say rewind the clock to April, which was another little
bit of a jostle for equities, we saw that even
(22:20):
though the trend program was long equities and was losing
money in those long equity positions, that was offset by
you know, shorts in currencies and longs in commodities and
shorts and bonds, and so you know, the very nature
here is we think these are long term strategies that
are uncorrelated to each other. We think over the long
run both are going to create positive returns, and so
(22:42):
we think they're better stacked. The short run, right, is
another matter entirely. Just as stocks can have a year
where they're down, we expect maned futures to have a
year that it's down. But as long as we systematically
stick to that trend following strategy, we think it's long term,
very additive to the portfolio.
Speaker 2 (22:59):
It's interesting, I notice this huge rush of ETFs that
protect your downside a little bit, if not completely. The
buffer ETFs and also the covered call strategies, it almost
seems like this managed futures return stacking ETF could compete
with those in that if you do stick to the
shorts being in there, that when the market does sell off,
(23:21):
it will have somewhat of a buffer effect in the portfolio.
And just seems like there's a huge market for that.
Is that, I mean, I guess that's the biggest one.
Is that part of the reason why that one sold
the best?
Speaker 4 (23:34):
I think so. And these stats actually I think come
from York and these blew my mind as there's over
fifty billion in those buffered ETFs. Yeah, that launched what
five years ago, and over fifty percent of ETFs launched
year to date include derivatives in them, which I think
is a big change. So it really speaks to the
changing market environment and what people are looking for in
(23:54):
an allocation product. Short answers, Yes, right, those buffered products
are going to use options to try to explicitly manage
your downside risk, whereas what we're trying to do, which
comes at a cost. Right, if you're buying insurance, there's
a cost to insurance. What we're trying to do is
say we're not contractually hedging downside risk. What we're trying
to do is add an alternative investment strategy that we
(24:17):
think generates positive long term returns and has really attractive
diversification properties to your portfolio. And in doing so, not
only do we think we can outperform over the long run,
right that portable alpha create those excess returns, but you know,
we think there's a strong probability that in those large
draw down environments, those big macroeconomic shocks twenty twenty two,
(24:40):
A two thousand and eight, in early two thousands, these
are the sort of strategies that can adapt and have
the flexibility and the breadth of assets that they're trading
to create a positive return and hopefully offset some of
those losses in either the underlying stocks or bonds.
Speaker 3 (24:54):
Corey, I'm curious where else do you think you can
take the strategy you mentioned you've got one more product
that you can add to the suite.
Speaker 1 (25:00):
Is that is that it and then you grow the
AUM from there?
Speaker 3 (25:03):
Or do you think that there might be more opportunities
to grow the number of offerings you guys have.
Speaker 4 (25:08):
I think going back to the idea that we want
this to be legos in building blocks for allocators. There's
a number of combinations we can start to build, right,
So we're looking towards the end of the year to
launch a bonds plus merger arbitrage strategy. But I think
you can still even look towards more vanilla combinations like
stocks plus commodities, bonds plus gold. I'm sure we could
(25:30):
look at something like stocks plus bitcoin, right, not appealing
to everyone, But as we continue to build the suite
out and think about these different combinations of both passive
and active diversifiers, I don't want to say there's unlimited combinations,
but there's certainly a large, fat tail of combinations. What
we're trying to do with the first call it six
(25:53):
to nine products is really make sure we hit the
big trends that people are looking for, both the big
underlying assets well as the big diversifiers. And then as
we get towards products ten to fifteen, I think you'll
start to see sort of a less appetite for the
specific implementation as we sort of slice and dice the
market a little bit.
Speaker 1 (26:11):
Dinner.
Speaker 3 (26:12):
Okay, last question, favorite ETF ticker other than your own.
Speaker 4 (26:18):
It's now defunct, unfortunately. Let's okay at cy CYA and
why that one from Simplify. It was a tail hedging ETF.
And this is not a commentary on the product itself,
but CYA standing for cover your Ass. And I thought
that was a pretty clever ticker.
Speaker 1 (26:37):
Yeah, yeah, that.
Speaker 3 (26:39):
Is pretty good.
Speaker 1 (26:39):
That's a good one.
Speaker 2 (26:40):
That's that's never been used before.
Speaker 1 (26:44):
I know that ETF.
Speaker 2 (26:46):
I thought this, you know, I thought it was a
great ticker when it came out. Good one man, pretty inspired.
Although I know you're kind of friendly with them, and
that's sort of your your.
Speaker 4 (26:55):
World if I try to keep my fingers on the
pulse of the market to okay, I follow you, so
I see what's getting launched.
Speaker 1 (27:02):
All right, Corey Hofsen, thanks so much for joining us
on Trillions.
Speaker 4 (27:05):
Thank you guys.
Speaker 3 (27:12):
Thanks for listening to Trillions.
Speaker 4 (27:14):
Until next time.
Speaker 3 (27:15):
You can find us on the Bloomberg Terminal, Bloomberg dot com,
Apple Podcasts, Spotify, or wherever else you'd like to listen.
We'd love to hear from you. We're on Twitter. I'm
at Joel Webber Show. He's at Eric Baulchunas. This episode
of Trillions was produced by Magnus Hendrickson.
Speaker 1 (27:33):
Bye
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!