Portable alpha (or as we like to call it: Return Stacking) has become increasingly popular in the financial media (including recent notes from industry giants like BlackRock, Russell Investments, and AQR) but many advisors are left asking: What does portable alpha mean? How might it benefit clients? How can I implement it?

At Return Stacked Portfolio Solutions we have made it our mission to thoughtfully and transparently help allocate into a portable alpha framework for client portfolios.

Join us for this deep dive podcast with Corey Hoffstein, CIO of Newfound Research, and Rodrigo Gordillo, President and Portfolio Manager at ReSolve Asset Management Global, as we explore:

• What 'Portable Alpha' is: Review of the history and theory of the concept.
• Outperformance Potential: Portable alpha/return stacking allows allocators to stack asset classes/strategies with positive expected returns on top of core assets which can help improve the likelihood of outperforming the market.
• Diversification Benefits: Using return stacking to stack low correlation strategies on top of the core portfolio can help reduce portfolio drawdowns, thus influencing likelihood of achieving financial plan goals.
• Behavioral Benefits: Sticking with low-correlation diversifiers can be difficult for clients. Return stacking can improve the likelihood clients stick with diversifiers long enough for them to realize the benefits.

And this was.

2

sort of mind breaking was that the

alpha, if we can call it alpha, that

3

was being generated, the excess return

above the S& P 500 of this program,

4

was not coming from the asset that

investors were trying to get exposure to.

5

It wasn't coming from the beta.

6

It wasn't coming from security

selection within equities.

7

It was coming from where

PIMCO thought they had skill,

8

security selection in bonds.

9

And they were able to port that

alpha on top of the S& P 500

10

beta that investors wanted.

11

And thus, the concept of

portable alpha was largely born.

12

It was actually originally called

transportable alpha, eventually

13

shortened to portable alpha.

14

Rodrigo Gordillo: Hello,

everybody, and welcome to the

15

ReturnStack Portable Alpha webinar.

16

thank you everyone for joining us today.

17

My name is Rodrigo Gordillo

and, uh, today we're going to

18

be talking about Portable Alpha.

19

I'm the president of Resolve

Asset Management and co founder

20

of the Return Stacked ETFs.

21

And it's my pleasure to have you all

join us for what I think is going

22

to be an enlightened discussion on

a topic that's gaining significant

23

traction in financial media.

24

I mean, We've had close to 350 people

sign up for this webinar already, which

25

is actually the largest group that we've

had in any one of these webinars thus far.

26

And there's just honestly an

incredible update and discussion

27

around the topic recently.

28

We're super excited to cover

it all in detail today.

29

And we're very lucky to have with us

Corey Hofstein, the Chief Investment

30

Officer of Newfound Research, my fellow

co founder of the Return Stacked ETFs.

31

Corey's an absolute visionary

in quantitative investing

32

and portfolio construction.

33

He really is known for his innovative

approach as to tackling complex

34

financial topics and making them

as accessible as possible to the

35

advisor and investor community.

36

So he's a great person

to have on board today.

37

Of course, the focus being Portable Alpha.

38

This strategy.

39

really involves separating beta, which

is passive market returns, from alpha,

40

which is the excess return from active

management, to help us build more

41

efficient and diversified portfolios.

42

Now, of course, this

concept isn't entirely new.

43

It actually dates all the way back to

44

PIMCO, PIMCO stock plus, um, concept that

has been around for a bunch of decades.

45

Corey will cover that in detail,

and You know, it died for a bit.

46

We're going to cover that as well, but

recently it's got a resurgence and as

47

advisors and investors are seeking to

enhance returns or better risk manage

48

their portfolios in what is likely

to be a low yield environment, right?

49

We have high valuations in stocks.

50

We're starting to see

yields come back down again.

51

And so today what we're going

to cover is four major things.

52

We're going to cover an approach

that institutions have used since

53

the 1980s to pursue excess returns in

their portfolios and see how we can

54

transfer that over to the retail space.

55

How we can pursue alpha in high

conviction, high opportunity areas

56

without disrupting the, you know,

hallowed core stock and bond exposure

57

that everybody needs to have exposure to.

58

And how this approach can be used to

introduce alternative diversifiers

59

and may even help curb some

behavioral biases of using them.

60

Those alternatives and ultimately we're

going to try to give you some examples

61

of how one can implement it today.

62

So, throughout this webinar, I'll be

moderating the discussion and I may

63

post some questions to Corey to unpack

these concepts as thoroughly as he can.

64

We do encourage you to submit

questions via the chat function.

65

I'll try to address as many

of those as possible during

66

the Q& A session at the end.

67

And I think we're ready, but before I

pass over the mic to Corey, We did have

68

a few poll questions that I'm hoping

that the audience participates in.

69

Um, so the first poll question

is how many people here are A.

70

actively using Portable Alpha slash

return stacking and portfolios today?

71

B.

72

how many people are contemplating

the use of Portable Alpha and

73

return stacking in portfolios?

74

And C.

75

don't currently use Portable Alpha or

return stacking in portfolios today?

76

All right, I see that

the poll is moving along.

77

Give that a few seconds to

get a nice sense of things.

78

Oh, it's looking good.

79

Option A is, uh, is winning though.

80

Moving around.

81

Give it five more seconds.

82

Okay,

83

I'm going to end the poll there

for everybody to see, um, and

84

we're going to share the results.

85

So we see, um, around 45 percent of people

are currently using it, 36 percent are

86

contemplating it, and 20 percent around 19

percent are not, uh, currently using it.

87

Okay, so just a quick follow up

question, um, the next, uh, could

88

you put up the next one, Ani, please?

89

Of those who do use Portable

Alpha, um, what has been the

90

most significant challenge to

implementing it in your organization?

91

And the first question is, lack

of understanding and experience,

92

poor experience in the past, or you

struggle finding reliable overlays?

93

Okay.

94

Lack of understanding

and experience is 49%.

95

Poor experience in the past is 16%.

96

And then struggle finding

reliable overlays is.

97

Okay, great.

98

So this will kind of give you

a good feel, Corey, for the

99

audience and their sophistication.

100

It looks like we have a lot of people here

with, with some experience, so we might

101

be able to delve deeper into the topic.

102

But without further ado, you have

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Corey Hoffstein: the floor.

104

Well, wonderful.

105

Thank you, Rod.

106

Really excited to talk on this

topic today because it's a topic I'm

107

really very passionate about and I

don't want to bury the lead here.

108

Rod talked about all the

things you're going to learn.

109

I want to talk about what

I hope you take away.

110

And for me, the core concept that I hope

you take away is that being thoughtful.

111

about how you actually structure your

portfolio may be a much simpler and

112

I would argue smarter way to pursue

outperformance and diversification, uh,

113

particularly versus traditional means.

114

And that's what portable alpha and more

broadly return stacking is all about.

115

This is an idea, as Rod mentioned, that

select institutions have been using for

116

decades and it is, I think, gaining.

117

Relevance again because it's not

just limited to institutions who have

118

coverage from banks that are now able

to implement this, but through mutual

119

funds and ETFs this is a concept that

can now be implemented by everyone.

120

So let's start with what is the

problem that return stacking and

121

portable alpha are trying to solve.

122

Now on this slide, what I

have is a breakdown of the

123

MSCI All Country World Index.

124

So this is a global equity benchmark

broken down mostly into regional

125

components and then within those regions

broken down by market capitalization.

126

And I've highlighted two slices.

127

That big blue slice on the right is U.

128

S.

129

large cap, which as of today is Over

50 percent of the MSCI ACWI index.

130

So if you are a global investor,

you are over 50 percent of your

131

equities are in us equities.

132

And then that green slice is

international developed EFI, small

133

and mid cap coming in at just 7.

134

7%.

135

And what I want to highlight here

is for each of those categories

136

for us, large cap and EFI smid cap.

137

What I did is I went and I found what's

called the success rate of active

138

managers, uh, in, in actually delivering

excess returns versus their benchmark.

139

So I went to the Morningstar active

versus passive barometer report.

140

And I said, over the last 15 years, what

percent of managers in these categories

141

have actually beaten their benchmark.

142

And if you look at the U.

143

S.

144

large cap slice there, what you

see is less than 10 percent of

145

managers actually beat their

benchmark over the last 15 years.

146

In other words, if you 50, reround the

clock 15 years ago and just chose a

147

manager at random, you had a less than

1 in 10 chance of identifying a manager

148

who actually would beat the benchmark.

149

Compare that to the EFY small and mid cap.

150

It had over four times

the success rate, right?

151

So you had a four times better chance

if you were just choosing at random

152

of actually identifying a manager

who would go on to beat the benchmark

153

and deliver those excess returns

for you over the next 15 years.

154

Now, my guess is for all the U.

155

S.

156

allocators on this call today,

99 percent of them have never

157

even looked at evaluating an

EFI small cap, mid cap manager.

158

And that's largely because

one, this is a global pie.

159

Most U.

160

S.

161

investors actually have

a much larger slice of U.

162

S.

163

large cap equity because

of A home equity bias.

164

Um, but two, when you have

so much exposure to U.

165

S.

166

large cap, that's where you want

to focus your efforts, where

167

all your capital is allocated.

168

And yet you have this trade off

where, where the majority of your

169

capital is allocated is actually the

place that's hardest to find alpha.

170

And, and even though the EFE small and

mid cap has a four times better chance

171

of delivering alpha historically,

I'll point out it's still below a coin

172

flip that you would have actually been

able to identify a manager At random.

173

And so particularly in the U S large

cap space, it's a big question of,

174

do I have the manager search skill

to find that one in 10 manager who

175

is actually going to deliver alpha

for me over the next 15 years?

176

And if not, what do I do with

this massive part of my portfolio?

177

That's eating up all my capital.

178

Now this was a question that

179

equities but actually in bonds.

180

They ran a large number of

treasury mandates as well as

181

a large number of fixed income

mandates that were benchmarked.

182

To broad U.

183

S.

184

fixed income.

185

What I have here is a snapshot

today of how the Bloomberg U.

186

S.

187

aggregate bond index has broken out.

188

And what I've highlighted

is the treasury allocation.

189

44 percent of this

benchmark is in treasuries.

190

And so if we're trying to beat this

benchmark, this is almost a 50 percent

191

slice in which security selection

really isn't going to help us.

192

A 10 year U.

193

S.

194

treasury is fungible with

all the other 10 year U.

195

S.

196

treasuries.

197

And so unless we're willing to take

credit or duration risk, go outside U.

198

S.

199

treasuries to maybe corporates or

something else, this is a big chunk

200

of the, of the pie that becomes very

difficult for us to try to beat.

201

And again, just eats up a lot of dead

capital from an active risk perspective.

202

So, What did PIMCO do?

203

Well, some very clever PMs realized

that instead of investing in U.

204

S.

205

treasuries themselves, instead of

actually buying the bonds, they could

206

use derivatives, capital efficient

derivatives, to gain exposure to the

207

asset class and only have to use a

little bit of that capital, of that

208

say 44%, only give a little bit of

that capital as collateral and free

209

up the rest of that cash to invest.

210

So if, for example, if they invested

it in cash, um, they, they would

211

basically end up with the same return.

212

So let me walk through this,

because this can be a little bit

213

confusing without an analogy.

214

Imagine you have a million

dollars and you're looking at

215

buying a million dollar house.

216

One of your options is

to just buy the house.

217

Right?

218

You give them the million dollars,

and in return, you get a house.

219

And that's effectively what you'd have

on the left side of this equation.

220

You, you bought the actual

asset, and you would earn the

221

actual return of that asset.

222

The other option is that you go

to a bank, and you get a mortgage,

223

and you finance your purchase.

224

And you keep that million dollars,

and you get the return of the house.

225

Minus the financing cost of that mortgage.

226

And so long as you take that million

dollars and invest it in something that's

227

going to offset that financing cost

of the mortgage, you're net neutral.

228

But you now have all that cash

available to you if you want to use it.

229

And what the folks at PIMCO realized

was, well, they could take all that

230

cash that's available to them and

say, well, what if we not just tried

231

to offset that cost of our mortgage,

but what if we tried to outperform it?

232

What if instead of investing in short

term T bills, which are effectively

233

the cost of financing embedded in

treasury futures, what if we took

234

a little bit of duration risk?

235

What if we took a little

bit of credit risk?

236

What if we went out on the risk

curve a little, not a lot, just a

237

little, to try to get a yield pickup?

238

And if you work that equation

through and say, well, I'm still

239

getting the returns of the U.

240

S.

241

Treasuries, Minus the embedded cost of

financing, but now I'm taking all that

242

cash and investing in something that's

going to outperform that financing.

243

Well, now all of a sudden I took a

big dead slice of my portfolio where

244

I couldn't perform security selection,

where I didn't think I had an alpha

245

edge, and transformed it to add the

ability to create an alpha edge.

246

Here, where PIMCO said they thought they

had an edge in selecting short term bonds.

247

And so, in effect, they were able

to port all this sort of short term

248

bond selection alpha on top of the U.

249

S.

250

Treasury position they had that

was the otherwise dead space.

251

That happened in the early 1980s.

252

This is what they call

their bonds plus program.

253

In 1986, S& P 500 futures launched

and PIMCO pretty quickly realized,

254

excuse me, it might've been 1983,

255

quickly realized that the same thing

could be done with equities, right?

256

If you were an investor and you had

a U S equity mandate, PIMCO said.

257

Well, give us the cash.

258

And what we'll do is we'll get you S& P

500 exposure through S& P 500 futures.

259

They're going to track that

S& P 500 exposure perfectly.

260

They're going to have a cost of financing

embedded, but if we take all the cash

261

that we freed up and we invest it in

short term, slightly riskier bonds,

262

you know, slightly, maybe short term

corporate bonds, try to get a little

263

bit of yield pickup versus that cost

of financing, suddenly we are going to

264

be able to provide you S& P 500 returns

plus a little bit of return and what's

265

incredibly powerful about this concept.

266

And this was.

267

sort of mind breaking was that the

alpha, if we can call it alpha, that

268

was being generated, the excess return

above the S& P 500 of this program,

269

was not coming from the asset that

investors were trying to get exposure to.

270

It wasn't coming from the beta.

271

It wasn't coming from security

selection within equities.

272

It was coming from where

PIMCO thought they had skill,

273

security selection in bonds.

274

And they were able to port that

alpha on top of the S& P 500

275

beta that investors wanted.

276

And thus, the concept of

portable alpha was largely born.

277

It was actually originally called

transportable alpha, eventually

278

shortened to portable alpha.

279

And almost 10 or 15 years went by

before institutions realized that

280

this could be generalized far more

than the way that PIMCO was doing it.

281

If you look at the concept more

generically, basically what's happening

282

is institutions will look at their

portfolio and find areas of large

283

swaths of beta that they have low

conviction that active managers will

284

be able to outperform that beta.

285

And if they believe that that beta can

be cheaply replicated using derivatives,

286

such as say the S& P could be replicated

by buying S& P 500 futures, then they're

287

able to free up quite a bit of cash.

288

that they can then

allocate to other places.

289

And those other places for PIMCO was,

well, we can pick short term bonds,

290

but we can go far beyond allocating

just short term bonds when we think

291

about finding additional alpha sources.

292

So again, let's break

this down step by step.

293

Step one here, you are going and looking

at your portfolio and saying, there are

294

large allocations that I have that I don't

have conviction that active management

295

is going to generate alpha, particularly

after fees or with any significant

296

degree of certainty, and I believe that

I can replicate this using derivatives.

297

This is the view an

institution would have.

298

The institution will then go and try

to replicate that passive portfolio.

299

So again, let's say the S& P

500, they might go to a bank

300

and ask for a total return swap.

301

They might go trade futures and

get S& P 500 futures exposure.

302

They could synthetically

replicate it with options.

303

There's a variety of available

choices here, but the point is

304

they're going to choose A derivative

structure that effectively gives

305

them leverage, much like, again,

buying a house using a mortgage.

306

They're able to get all the

exposure of the S& P 500 without

307

putting the cash up front.

308

Now, they'll hold a little bit of cash

aside as cash collateral, but not nearly

309

all the capital that you would need.

310

So I want to dive in here, just peel

back the onion one layer deeper, because

311

I think, I think it's, it's worth it to

really drive home how this is working.

312

Let's say I was an institution and

wanted a hundred million dollars

313

of exposure to the S& P 500.

314

One way I could get that exposure is

I could just buy a hundred million

315

dollars worth of an S& P 500 ETF.

316

I put this together a few weeks ago, so

the numbers aren't perfect for today's

317

market, but you know, if you're going

to go buy the SPY ETF, you're basically

318

buying 175, 000 shares of SPY to get

a hundred million dollars of exposure.

319

And you're done.

320

And again, you're going to have the very

physical presence of the S& P there.

321

The other thing you could do is you

could go and buy all the underlying

322

components of the S& P 500.

323

Then you've got to manage the

index additions and deletions over

324

time and figure out what you want

to do with the dividends, right?

325

But again, it's more or less the same

thing as buying this S& P 500 ETF.

326

You're just managing the basket yourself.

327

The third thing you could do is

you could buy S& P 500 futures.

328

Now, without diving too deep, the

important part is today, every

329

futures contract gives you the

notional exposure of about 280,

330

000 worth of S& P 500, right?

331

And so for 100 million of exposure, it

means you only have to buy 350 contracts.

332

Now, if you go to CME, And ask how much

margin you need to post for each contract.

333

They'll say it's about 14, 000, right?

334

So you have to put up 14, 000

in cash to get about 280, 000.

335

of exposure the S& P 500.

336

That's about 5 percent

of the capital, right?

337

That's like basically buying a

house by putting 5 percent down.

338

Similar ish concept.

339

But what that means now is that you've

only had to put up about 5 million

340

to get 100 million of exposure, and

the other 95 million is now free.

341

for you to do whatever you want.

342

Now prudence would tell us we probably

don't want to run our margin limits that

343

tight, we want to have a nice liquidity

buffer, but the point is through using

344

the futures we get the exposure to the

S& P 500, but we've now freed up all

345

this cash that we can invest elsewhere.

346

And that elsewhere doesn't just have to

be short term bonds the way PIMCO did

347

it, that elsewhere could be long short

equity strategies, it could be CTAs,

348

it could be global macro strategies,

it could be event driven strategies,

349

it could be any source of alpha Or

diversifier or asset class or strategy

350

that you think is going to generate

positive returns above cash over time.

351

Rodrigo Gordillo: Rod.

352

One question that came up in this chart

here is how safe is the safety buffer?

353

Um, I don't know if

you can expand on that.

354

Obviously it's going to

depend on the institution, but

355

Corey Hoffstein: yeah.

356

So this is going to depend

both on the institution and

357

what you're porting on top of.

358

And the alpha source.

359

And I know that that's a lot, but

if you are porting, say on top

360

of the S& P 500, that underlying

index is very volatile, right?

361

That S& P 500 can drop 50%.

362

And so you're going to want a much

larger safety buffer to make sure you

363

don't have any meaningful margin calls.

364

If you're porting on top of, you know,

if your policy portfolio or strategic

365

allocation has a big bond allocation,

you could port on top of bonds.

366

And require much, uh, much less

of a safety buffer because bonds

367

are just going to move less.

368

I actually, uh, recently had a

conversation with a very large, uh,

369

public pension who's been doing portable

alpha for a better part of a decade.

370

And they said that they're,

they internally only port on top

371

of bonds for this very reason.

372

Um, they, they used to

port on top of equities.

373

They said it's harder to

manage operationally for this

374

margin and safety buffer.

375

And so they choose to

port on top of bonds.

376

So that's one of the, you know,

again, it's going to vary depending

377

on what you're porting on top of.

378

End of the day picture that really

matters here is how this all comes

379

together to generate a return, right?

380

And what we get when we talk

about the end picture is.

381

When you run the Portable Alpha program,

you get that S& P 500 exposure and

382

you add this alpha source on top.

383

And this portfolio will outperform

so long as that alpha source

384

outperforms cash over the long run.

385

Cash here being basically T bills.

386

And so this is, for many people, a

totally new way of thinking about

387

generating outperformance, right?

388

You don't need to beat the market.

389

by finding a manager who

can pick stocks better.

390

You can beat the market by structurally

changing your portfolio to free

391

up capital to invest in something

that you just think is going to

392

beat T bills over the long run.

393

And suddenly that allows us to

think about all sorts of different

394

investing components as Lego

building blocks in many ways, right?

395

So what we've done here is we've taken

the return for all these different asset

396

classes and hedge fund strategies Whether

it's gold or trend following or market

397

neutral, long, short, relative value.

398

And we've said, what is their return

been above T bills over the long run?

399

That excess return is effectively the

thing that through Portable Alpha we can

400

try to stack on top of our portfolio.

401

And then we can sort of mix

and match as we see fit, right?

402

Maybe you're someone who believes in

having a big allocation to gold in your

403

portfolio, or maybe you like the idea of

long short equity and matching it with a

404

macro strategy, or trend following plus

carry strategies, and you can choose both

405

the size, And the combination of what

you're stacking on top to try to match

406

the active risk budget that you have,

as well as meet your core objectives.

407

And so if we compare the old world

way of thinking about trying to beat

408

the market, right, to the new world

approach, I think there is some

409

substantial improvements in terms of the

likelihood of generating outperformance.

410

In the left half of this slide, what we

show is the performance of top quartile U.

411

S.

412

large cap equity managers

over the last decade.

413

So these are managers, uh, who

out, who are in the, again,

414

top 25 percent of the category.

415

They generated, on average, about

120 basis points of excess returns.

416

So the market returned

about 11 and a half percent.

417

They added about another 120

basis points on top of that.

418

And that assumes again, you could rewind

the clock a decade ago, identify that top

419

someone in that top quartile or a basket

of managers in that top quartile and

420

stick with them over the next 10 years.

421

I want to compare that to

the second graph, which just

422

basically takes the S& P 500 U.

423

S.

424

large cap and stacks generic

hedge fund category beta on top.

425

Here I'm just using a generic

Credit Suisse hedge fund

426

index, minus that cash return.

427

And you can see without having to do

anything special, without even trying

428

to pick the best performing hedge fund

managers, just saying give me generic

429

hedge fund beta, you would have stacked

275 basis points on top of the S& P.

430

Now we think you can be far more

thoughtful than this, but again,

431

the point here is do we have higher

conviction in our ability to identify

432

some long only equity manager

that can actually generate alpha?

433

Or do we have higher conviction in

our ability to identify a diversified

434

collection of alternatives that are going

to be able to beat cash over the long run?

435

And I think that's profoundly powerful

when it comes to thinking about generating

436

outperformance in our own portfolios.

437

Now, what's really interesting to me

about Portable Alpha is it's always been

438

this concept about beating the market.

439

But more fundamentally, what Portable

Alpha does is it solves what we

440

would call this funding problem.

441

One of the things we've said at Return

Stack Portfolio Solutions is that

442

diversification has always been this

process of addition through subtraction.

443

Thank you.

444

If you want to historically have

added diversifiers to your portfolio,

445

most investors had to sell down

something else to make room.

446

So as an example, on the far left, we

have an investor's benchmark allocation.

447

Typical, traditional 60 percent

stocks, 40 percent bonds.

448

And let's say they wanted to add 20

percent in some alternative diversifiers,

449

whether it's Some of the passive

asset class like gold or an active

450

investment strategy, the old world

approach required them to sell down

451

some of their stocks and some of their

bonds to make room for that allocation.

452

And the potential problem here is

it creates a two form hurdle rate.

453

First from performance perspective,

those alternatives have to outperform

454

the things that they replace.

455

to add value to the portfolio, right?

456

So whatever you're selling, whatever

you're buying effectively has to

457

outperform whatever you've sold.

458

Second is, in my opinion, creates an

important behavioral hurdle, right?

459

You're selling things that most

clients are comfortable with.

460

Stocks and bonds, they tend to be cheaper,

more transparent, uh, more tax efficient,

461

and you're replacing it with alternatives

that often they don't understand are

462

higher cost, less tax efficient, and it

creates, once again, this trade off of,

463

of a behavioral hurdle rate that it makes

it hard for the clients to stick with that

464

alternative when it is inevitably going to

underperform what you sold to make room.

465

The new world approach, that portable

alpha, And what we more generically

466

call return stacking, right?

467

When it's not just about trying to pursue

excess returns, but when it's also about

468

how we can just generally think about

structuring a portfolio, this new world

469

approach solves this funding problem.

470

by layering the alternative

on top of the benchmark.

471

You no longer have to make room,

you can just add it as an X, as an

472

additional, uh, allocation, effectively

expanding your canvas that you can,

473

that you can paint with, paint on.

474

So I want to go into a little

bit of an example of how this is

475

sort of played out historically.

476

People who know me will know that I

love Managed Futures Trend Following.

477

It's where I've spent a The majority of

my career and a ton of time in research.

478

And for those who don't know what

Manfruture's trend following is,

479

Manfruture's trend following is

an active strategy that can go

480

long and short, equity indices,

bonds, currencies, and commodities.

481

It typically uses trends.

482

to drive the signals when trends are

positive it'll buy when trends are

483

negative it'll sell and if you look at

the category what you found historically

484

is a really attractive return stream

from a diversification perspective it's

485

had very low correlation to stocks and

bonds it has exhibited positive long term

486

excess returns above the cash rate It's

exhibited at least, you know, going back

487

20, 30 years, positive returns during

large equity drawdowns and positive

488

returns during inflationary periods.

489

It's a very dynamic

strategy, very attractive.

490

So the question is why don't more

people have it in their portfolio?

491

And I would argue it is

this funding problem, right?

492

We all agree in this industry

that all else held equal, more

493

diversification is better than less.

494

But if we look at the average

allocator's portfolio, it typically

495

is just very stock and bond heavy.

496

And it's in my opinion, because of this

problem that to make room in a portfolio,

497

you have to sell those stocks and bonds.

498

And that lead leads to

incredible behavioral frictions.

499

I want to, I want to use a

chart to try to explain that.

500

So in the early two thousands, investors

would have loved alternatives, right?

501

What this chart shows is the relative

performance of, of a 50, 30, 20,

502

50 percent stocks, 30 percent

bonds, 20 percent managed futures.

503

Versus the benchmark 60 40.

504

And so when the line's going up, that more

diversified portfolio is outperforming.

505

When the line is going

down, it's underperforming.

506

And what you can see is that

alternatives were great for the

507

lost decade of equities, right?

508

The 2000 to 2010 ish period was

ultimately a lost equi a lost decade.

509

And so selling your equities and selling

your bonds to make room for a diversifier

510

like Managed Futures that did well

during that decade, clients loved it.

511

And if you were around during that

period, you'll remember everyone

512

was investing in EM and commodities

and making room for alternatives.

513

And then it was almost like the

decade flipped over and you got the

514

exact opposite story, which is U.

515

S.

516

stocks and bonds just went on

this perpetual bid grind up and

517

everything else underperformed.

518

on a relative basis, right?

519

And no surprise, alternatives were bad

for the last decade of alternatives.

520

So if you were selling stocks and

bonds to make room for managed futures,

521

this was a very painful experience.

522

And again, it creates this behavioral

hurdle because clients aren't

523

going to necessarily understand why

they have them in the portfolio.

524

And it's very hard for a client to

stick with 10 years of underperformance

525

versus something that's cheaper and

more transparent and more tax efficient.

526

And so, to me, it's no surprise that

527

were increasingly narrowly focused on U.

528

S.

529

equities and U.

530

S.

531

bonds.

532

Rodrigo Gordillo: And I just want

to make something, I think, clear

533

on this chart is that what we're

not saying is that they had negative

534

performance during this period.

535

They just underperformed the 6040

to such an extent that by the end of

536

the period, you would have, you know,

you're, you're back to where you were

537

had you started investing in 2000, right?

538

So it's the relative performance

that's a problem here.

539

You're still, you know,

they're still doing positively.

540

They're just doing worse than a 6040.

541

Thank you.

542

Corey Hoffstein: And so this

shows up, this behavioral issue

543

shows up in the actual data.

544

This table is from Morningstar, and

what it's showing is the investment

545

returns versus investor returns

of different managed futures

546

funds from 2019 through 2022.

547

2022 being a great year

for managed futures.

548

And the investment returns like,

well, if you invested a dollar at the

549

beginning, took it out at the end, what

was your total return over the period?

550

The investor returns actually track.

551

Dollars coming in and out of the fund

and how the average investor performed.

552

And what you find looking across

the category is that the gap between

553

what the investment realized and what

the average dollar weighted investor

554

realized was over 300 basis points.

555

Right?

556

Suggesting that most investors ended

up performance chasing this investment,

557

getting, not being in when they needed

to be, chasing good performance, and

558

then ended up selling out after the

run had already commenced and they

559

started potentially losing money again.

560

Again, timing diversification

is very, very hard.

561

You want to just have it perpetually

embedded in your portfolio.

562

But the old world way of making

room makes it very hard to stick

563

with from a behavioral perspective.

564

Contrast the new world way where we are

stacking alternatives on top, right?

565

So what we have here is the same graph

as before, but now instead of the 50,

566

30, 20 relative to a 60, 40, we have

the 60, 40, 20 relative to a 60, 40.

567

And you can see the relative

outperformance in the

568

2000s, not as strong, right?

569

Because again, that was

a lost decade for equity.

570

So by selling equities and

putting in managed futures,

571

you got that full return gap.

572

Here you still hold the

573

But you do get the benefit of having

those alternatives stacked on top.

574

And then in the 2010s, when those

alternatives largely went sideways

575

and stocks and bonds went on to have

sort of the highest Sharpe ratio ever

576

for a 60 40 portfolio, you didn't

necessarily lag behind because you

577

had to make room in your portfolio

and you had that big opportunity cost.

578

By stacking an alternative on top that

largely went nowhere, you Your performance

579

of the portfolio continued to keep up

with the generic 60 40 and so you had

580

potentially that diversifier in place

581

again going to prove its worth as a

diversifier versus stocks and bonds.

582

And so both from a performance and a

behavioral perspective, we think that

583

this concept of stacking diversifiers

on top of your portfolio rather than

584

selling core stocks and bonds to make

room is much more sustainable and

585

additive from both the diversification

and potential outperformance perspective.

586

And so we call this more generic idea of

Portable alpha return stacking, right?

587

The core idea here is that we are

layering one investment on top of each

588

other, achieving more than a dollar

of exposure for every dollar invested.

589

So as an example, uh, you could stack

a hundred percent managed futures trend

590

following on top of a hundred percent U.

591

S.

592

equity exposure.

593

And what's really exciting today

is that there are a number of funds

594

that are available that allow you

to implement this concept, whether

595

you want to do return stacking.

596

For diversification or you want to

pursue portable alpha for excess returns.

597

This is now achievable to anyone,

even if they don't have access

598

to banks and total return swaps.

599

Even if you can't manage derivatives,

you can use mutual funds and

600

ETFs to implement this concept.

601

The first way is through

what we call pre stacked.

602

fund solutions.

603

So here, these are funds that are going

to give you simultaneous exposure.

604

When you invest a dollar, you're

going to get a dollar of some

605

core beta plus some exposure,

alternative exposure layered on top.

606

So in this example, uh, we have a 100

100 fund that's going to give you for

607

every dollar invested a hundred percent

exposure to bonds and then a hundred

608

percent exposure to some alternative.

609

And you can see that if you have your

strategic, Call it 50 50 portfolio,

610

50 percent stocks, 50 percent bonds.

611

If you sell say 20 percent of those

bonds and invest in this 100 100

612

fund, if we X ray through what

we will get back is our strategic

613

portfolio, the 50 50 plus a stack of

that 20 percent alternative on top.

614

From the investor's perspective, right?

615

You're still allocating a hundred

percent of your portfolio.

616

You're just using a fund

that implements that stack.

617

And so these are pre stacked

fund solutions of which there are

618

a variety in the market today,

both mutual funds and ETFs.

619

And this presumes that you're going

to want to, you have a particular

620

alternative you want to stack on

top, and you can find a manager that

621

is doing that in a pre stacked way.

622

And you like the way they do it.

623

The other option is what we call

capital efficient solutions.

624

So these are going to be funds that

give you simultaneous exposure to

625

stocks and bonds, not because you

want to stack more bonds on top

626

of your portfolio, but because it

allows you to get the same stock bond

627

allocation with less capital deployed.

628

So as an example, let's

say there was a fund.

629

That for every dollar you invest, you get

a hundred percent exposure to equities

630

and a hundred percent exposure to bonds.

631

If you were a 60 40 investor, 60 percent

stocks, 40 percent bonds, you could

632

sell 10 percent of your stocks, sell

10 percent of your bonds, and put 10

633

percent into this 100 100 portfolio.

634

That 10 percent in the 100 100

portfolio would give you back 10

635

percent stocks and 10 percent bonds.

636

And now you've freed up 10

percent of your portfolio.

637

If you put that 10 percent in T

bills, these two portfolios will

638

effectively return the same thing,

but now you're free to invest

639

that 10 percent however you want.

640

You could invest it in a

strategic diversifier like gold.

641

You could invest it in an

active investment strategy.

642

You could run your own tactical

views through that freed up 10%.

643

And so long as that thing you

invest in outperforms cash, you

644

will have created outperformance

versus your 60 40 benchmark, right?

645

No longer does the outperformance

have to come from security

646

selection in your stocks or

security selection in your bonds.

647

You can simply say I've stacked

something on top that I think

648

is going to outperform cash.

649

And if it does, over your

investment horizon, you will

650

have outperformed your benchmark.

651

So some really key takeaways here.

652

One, portable alpha, or what we more

generically call return stacking, allows

653

investors to pursue alpha in alternatives

without disrupting that core beta.

654

Right?

655

Not just without disrupting, it

allows you to go outside of the core

656

beta to find those sources of alpha.

657

Particularly those core betas that we

think are hyper efficient, that it's

658

just really hard to beat the market.

659

We believe that there are some

alternatives like managed futures, as

660

an example, that can offer both a source

of potential excess returns, as well

661

as profound diversification versus a

traditionally allocated 60 40 portfolio

662

or just generic stock bond portfolio.

663

And so return stacking is

a more generic concept.

664

We believe can help mitigate

the behavioral biases associated

665

with diversification by solving

that funding problem, right?

666

Instead of having to make room

in your portfolio, you can now

667

stack these alternatives on

top of your core allocation.

668

And whether you choose to pursue this

with pre stacked fund solutions, or

669

capital efficient strategies, both offer

practical ways for every investor today

670

to implement return stacking as a concept.

671

So with that, I want to say

thank you everyone for tuning in.

672

Um, we're going to turn to some Q& A,

but quickly before that, I just want

673

to say if you have any questions about

implementing the concepts of Portable

674

Alpha or return stacking in your

portfolio, you can go to returnstacked.

675

com.

676

Go to the contact page.

677

You can either submit a question there

if one comes up after the webinar, or you

678

can schedule a time to meet with our team.

679

They're always happy and we'll

loop all the PMs in if necessary

680

if you want to do a deep dive.

681

There's also a huge amount of content

written about not only things you can

682

potentially stack and the pros and

cons of stacking them, but Things like

683

what's the tax efficiency of stacking?

684

Uh, what are the risks of stacking?

685

Uh, what are the costs of stacking?

686

Different ideas for how to

make this work, both for

687

diversification and outperformance.

688

How does it work, uh,

in a retirement context?

689

How does it work in a growth context?

690

And so there's been a ton of articles

written over the last decade.

691

So if you are looking for particular

insights, that is a great place to start.

692

And with that Rod, I will turn

it back to you for some Q and A.

693

Rodrigo Gordillo: Great job, Corey.

694

That was fantastic.

695

Very informative.

696

Um, you know, I actually want to

start with something that you said

697

in connection to a bunch of questions

that we've had, um, when you were

698

discussing allocating to that stack,

to those portable alpha stacks.

699

The questions revolve around, you know,

what is the best way to rebalance,

700

uh, across and what is the best way

to time when they're underperforming?

701

You know, how should one think about

strategic asset allocation versus

702

tactical asset allocation, if at all?

703

Corey Hoffstein: So a lot of the

point of this stacking, right, is

704

to avoid the tactical in many ways.

705

So if we go back maybe a couple of

slides to just the generic picture, old

706

world versus new world, right, whatever

we're stacking on top, hopefully we

707

have a high confidence view that it

will generate returns in excess of

708

T bills over our investment horizon.

709

Maybe not in the short term, um,

right, because anything can happen in

710

the short term, but over whatever our

investment horizon is, we think it's

711

going to be additive to our portfolio.

712

And so a lot of what we're trying

to achieve here is avoiding

713

the need to be tactical, right?

714

I don't have a view as to what managed

futures are going to do over the next 3,

715

6, 12 months, but I have high conviction

that over the next 20 years, they're going

716

to generate a positive return and be a

good diversifier to my stocks and bonds.

717

And so I'm just going to layer

them on top of my portfolio.

718

This is exactly what I do in my

PA, by the way, uh, so that I don't

719

have to make that timing decision.

720

That said, it doesn't preclude people

from running tactical strategies, right?

721

We talked about this idea of using

capital efficiency to free up room.

722

You can, in theory, and I've met with

advisors and allocators who do this, who

723

say, when I have no view, I will just

put that freed up 10 percent of cash in T

724

bills, and I know I'm going to effectively

get the same return as my 60 40.

725

But man, I'm really worried about

inflation over the next year.

726

So I'm going to take some of that 10

percent and I'm going to put it in

727

commodities as a, as a bit of a hedge.

728

Or I might put a little bit

of crypto in there, right?

729

1%, 2 percent of the new crypto ETFs.

730

And then when I, when I don't

have that macroeconomic view,

731

I can take it off again.

732

And so you can use the, this concept to

express tactical bets for sure, but when

733

it comes to stacking the alternatives,

in my view, a lot of what we focus on

734

at ReturnStack Portfolio Solutions and

with our ETF suite is strategic stacks.

735

Rodrigo Gordillo: Excellent.

736

So let's, let's continue to go down

that path of When you allocate these

737

portable alphas and, and the risks that

are involved because, you know, we talked

738

about how PIMCO was around in the 1980s

doing this, it became super popular.

739

I think the number up to 2008

was that 25% of institutions were

740

using some sort of portable alpha.

741

Then we didn't hear about it for

a decade plus what happened that

742

took people's, uh, foot off the

gas, if not completely off the gas.

743

Corey Hoffstein: Yeah.

744

So I, I mentioned this idea of.

745

That pension, right, that said they

will never allocate portable alpha on

746

top of the S& P because of the risk

they always do out of the top bonds.

747

That was a lesson hard learned in 2008.

748

Doesn't mean it can't be done, by

the way, but you need to be careful.

749

So if we actually look at like the

picture of portable alpha, right,

750

where you're replacing some generic

index with some derivative, and

751

then you're buying an alpha source.

752

What happened in 2008 was, Multipart.

753

One, there were people who were

replacing equities with highly

754

levered derivatives, right?

755

S and p total return swaps that they

weren't having enough margin or, or

756

safety buffer, particularly in the case

that markets went on to fall 50%, right?

757

If, if markets fall 50% and you only

have a 20% margin buffer, well you're

758

gonna run outta capital and your

position's gonna get closed on you.

759

So you need the ability to

rebalance between whatever you're

760

porting or stacking on top.

761

Now a lot of what was being allocated

to were hedge fund strategies and

762

there was a two fold problem here.

763

The first was that the alpha that was

supposedly there was actually ended up

764

being highly correlated to equity markets

during this huge liquidity crunch.

765

It really wasn't diversifying alpha and

it was really liquidity risk packaged

766

up as alpha and then express the same

losses that happened as the equity.

767

So you were losing on your equities at the

same time you were losing on your alpha.

768

And then when these institutions went to

redeem from that, uh, hedge fund, either

769

that caused the losses to be greater,

creating this liquidity spiral, right?

770

Or the hedge funds just outright gated the

redemption, which meant they couldn't come

771

up with the cash to meet the margin costs.

772

The last part being, some of

the counterparties, right, were

773

banks that went bust, right?

774

If your counterparty was Lehman and

you had an S& P 500 total return swap,

775

you were left hanging saying, I don't

know where my exposure lies anymore.

776

And so, operationally, it was a mess from

a, from a, what was getting ported on top.

777

I think, candidly, things

went a little too far.

778

People didn't have enough scrutiny

as to what was being added.

779

They weren't balancing their

liquidity needs appropriately.

780

When you talk to people implementing

Portable Alpha today, They are mostly

781

focusing on liquid alternative strategies

that they can redeem very easily.

782

Things that they have a high

confidence are going to be

783

uncorrelated with stocks and bonds.

784

And they are trying to port on top

of assets that they don't think can

785

drop 50 percent in a year, right?

786

They're porting on their lower duration

treasury exposure, for example.

787

And so there's much less

risk of a margin call.

788

So there were some hard

789

I don't think it was a

knock on the concept.

790

I think it was a knock on

how it was implemented.

791

And I'll add, uh, you know, PIMCO

has been, again, doing this in some

792

fashion since the 1980s, had zero

problem in their implementation.

793

Rodrigo Gordillo: I was going

to say that, I mean, it's the

794

important evolution as well today.

795

Maybe it's not an evolution because

PIMCO has been doing it forever.

796

Is that when you're

looking at public products?

797

You are getting, you

have to be liquid, right?

798

You are, you are required to have

liquidity whether you're stacking

799

nothing or stacking something.

800

And the ability to manage that safety

buffer, margin buffer, isn't just about

801

how much safety buffer do I have, but

also can I redeem out of my alpha source

802

so I can manage the risk as it happens.

803

Uh, and then there's also the non recourse

aspect of funds that make it even more

804

attractive to the average investor.

805

So, Corey, let's talk about, let's

continue down the path of risk.

806

Um, we have We're stacking,

we're, we're levering.

807

I'm going to say the word we haven't said.

808

I don't think I've said that word

too much today, but we are levering.

809

And when people in the ETF space and

mutual fund space here of leverage,

810

they hear about the two times S&

P 500 ETFs, the three times bull.

811

And then we get into things like,

you know, the rebalancing, decay,

812

the, the variance decay, the double

the risk, double the exposure.

813

How do we think about the differences

between those two structures?

814

So when

815

Corey Hoffstein: we talk about these

pre stacked solutions, whether it's

816

capital efficient or your pre stacked

alternatives, how do they compare

817

to your traditional 2x products?

818

And I think what's really important

to think about here is the embedded

819

diversification that's happening

when you are doing the stacking.

820

So.

821

Um, on this slide, what I have is,

is the volatility of an S& P 500

822

fund, which has historically been

around 15, 15 and a half, versus the

823

volatility of a two times S& P 500 fund.

824

And no surprise, the two times

S& P 500 fund basically has

825

double the volatility, right?

826

And so you end up with

a very volatile product.

827

If you were to take the S& P 500 and

stack on top, say, generic trend following

828

index, like the Stock Gen CTA index,

You can't just add them together, right?

829

The vol of the S& P 500 is about 15.

830

5.

831

The long term vol of the Sock

Gen Trend Index is about 14.

832

You can't just say 15 plus 14 equals 29.

833

Because the way diversification

works by being uncorrelated to

834

each other, you actually see the

diversification of the portfolio drop.

835

This isn't new to anyone

who invests, right?

836

This is just the basic

principle of diversification.

837

So when you're doing this

stacking, yes, an S& P plus.

838

Say managed futures index type strategy

will be more volatile than the S&

839

P, but it's not necessarily going

to be double the volatility, right?

840

Because a lot of what's being traded

both long and short in that managed

841

futures strategy is not equity exposure.

842

It's bonds and currencies and commodities

that may be doing totally independent

843

things from what equity markets are doing.

844

And so when we think of that, the thing

that comes up all the time is both the

845

risk of the product itself, but also that

variance drag that everyone talks about.

846

Well, that variance drag really comes

from how volatile the product is.

847

And so when we go from the S&

P to two times the S& P, yes,

848

the return is twice as much.

849

But your variance is four

times as much, right?

850

When we go from the S& P to S& P plus

Managed Futures, your return is going

851

to be S& P plus Managed Futures, but

your vol isn't doubling the same way.

852

And so you don't get nearly the

same compounding, uh, variance drag

853

risks that show up in a product.

854

Or a concept like this, right?

855

And this goes back to me.

856

I mean, even if we just go way back to

the fundamentals of modern portfolio

857

theory, modern portfolio theory

always said find the most diversified

858

portfolio, the max sharp portfolio,

and lever it to your risk level, right?

859

That's effectively what portable alpha

and return stacking allow you to do.

860

And the reason that works is because

it allows you to really unlock

861

those benefits of diversification

in stacking these things on top.

862

Rodrigo Gordillo: Yeah, I mean, the,

the way when you, when you said returns

863

and, and, you know, it's four times the

variance, really, it's the returns are

864

the arithmetic returns, a simple addition,

like, if you're doing years, you're just

865

simply adding the years in a decade of

the S& P, you get a number, but that

866

number isn't what goes into your pocket.

867

It isn't the compound return.

868

It is the variance that defines how

much of that arithmetic return actually

869

goes into your pocket and the bigger the

variance, the less goes into your pocket.

870

So.

871

You know, in these concepts, when

you're doubling the S& P and quadrupling

872

the variance, you're getting less

in your pocket than you think.

873

But when you're doing a, when

you're stacking something that's

874

diversified, your variance drag is

significantly lower, and therefore the

875

stacking, the actual return stacking,

is expected to be higher, right?

876

Now, um, what do you think about You

know, that's the kind of top level topic.

877

A lot of these, um, even the non

correlated alpha sleeves that have

878

nothing to do with the S& P 500

sometimes lose at the same time as the

879

S& P or whatever beta you're using.

880

How should people think about how

that's going to feel, um, short term and

881

long term in terms of risk management?

882

Corey Hoffstein: Yeah, it's a

really important question, right?

883

Uncorrelated does not mean

negatively correlated.

884

Um, if we were to just stack

something that's perfectly negatively

885

correlated on top of the S& P.

886

Uh, we shouldn't expect a return

other than, you know, the risk

887

free rate or else you've somehow

maybe found an arbitrage, right?

888

So, so the point is we

have to take some risk.

889

Um, on average, on a, at a fund level,

right, if you have the S& P 500 plus

890

managed futures, that fund is going

to be more volatile and the average

891

drawdown is going to be bigger.

892

Average per year.

893

What you tend to find though, if

you look at historical samples

894

and simulations, is that the big

drawdowns Are not as bad, right?

895

You know, again, what zero

correlation means is not when the

896

S& P is down, this thing will be up.

897

It means when the S& P is down, it's

a coin flip as to whether the whatever

898

you're stacking on top is down or up.

899

And if it's up, it's a coin flip as

to whether this thing is down or up.

900

It should be totally, you get no

information about the direction this thing

901

is moving based on what the S& P has done.

902

So you get a slightly higher, um, vol.

903

That said, again, it goes back to

how you're spending your active risk

904

budget, because this isn't really

any different at the end of the day.

905

If you're, you know, say buying a value

fund instead of stacking something

906

on top of the S& P 500, well, you're

still getting the S& P 500 and then

907

you're getting all those active picks.

908

And it's possible that the S& P

goes down at the same time those

909

active picks underperform, right?

910

And so for me, you're getting much

the same concept, but I get to

911

choose how I spend my active risk

budget and put it into things I

912

have much higher conviction in.

913

Rodrigo Gordillo: So the um, when you

look at the stacks and that active

914

risk budget that you mentioned, I

think a lot of questions around like

915

how much, how much is a good stack?

916

Like what should I be

stacking at any given time?

917

What's, what's uh, going

to be useful or not?

918

You talked a little bit about

your active risk budget.

919

Like how should people

think about that amount?

920

Corey Hoffstein: Yeah.

921

So, so really simple math.

922

And then I'll tell you sort

of some practical examples.

923

Let's say you have something that has.

924

10 percent volatility that you want

to stack on top of your portfolio.

925

You have a 60 40 totally passive

and you stack something that

926

has 10 percent vol on top.

927

For every 10 percent stack you add,

you're creating 1 percent tracking error.

928

So what does that mean?

929

That means within a given year,

a 1 percent tracking error means

930

you'll be mostly plus or minus

2 percent to your benchmark.

931

That's the risk you're taking.

932

And so what I say to people is, You know

what you're stacking on top if you're

933

putting managed futures and gold and

you know other strategies typically

934

that blend is going to look like 10%.

935

And so if you put a 10 percent

936

you're going to be plus or minus 2%.

937

Does that feel good or

does that not feel good?

938

You put a 20 percent stack on you're

going to be plus or minus 4 percent right?

939

Does that feel good?

940

Does that not feel good?

941

What we tend to find in practice and

working with most allocators is that 10

942

percent is sort of the The minimum, unless

you have a really high vol alternative

943

that you're stacking on, 10 percent tends

to be the minimum to make a difference.

944

You start talking about getting

north of 30 percent and clients

945

really start to notice that their

portfolio isn't behaving like.

946

Generic stock bond portfolio anymore.

947

And so really we started to start to

put limiters on it, like the 20 percent

948

mark and say, you really have to be sure

your clients are super well educated.

949

I personally go well beyond that

limit because this is where I like

950

to spend all my active risk budget.

951

And I really like the things that I

stack on top, but I have high conviction.

952

Conviction cannot be rented, right?

953

If you're going to go that route,

you really have to believe it.

954

And you have to believe if you're

allocating on behalf of other people,

955

whether it's your fund board or.

956

Or your, you know, uh, clients, if you're,

if you're an advisor, that they can

957

actually stick with what you're doing.

958

And we find sort of the best approach

is somewhere around 10 to 20%, and

959

don't do all that with one fund.

960

Find three or four pre stacked

solutions or things that you can

961

stack on top so that none of them

are catching the investor's eye

962

from a line item risk perspective.

963

Rodrigo Gordillo: Awesome.

964

Um, we're a minute in.

965

I think there's one more important

one I think we should try and cover

966

quickly, which is how viable is return

stacking when it's so expensive to borrow

967

in a high interest rate environment?

968

Corey Hoffstein: Yeah, so this is a

question we get all the time, which

969

is, well, this idea must have been

970

you were just stacking, uh, on a risk

free rate that was effectively zero.

971

And the answer is that we're always

trying to stack excess returns, right?

972

And so all we're trying to

do is say, well, what is the

973

return of an asset minus cash?

974

And people say, well, cash

is so much higher today.

975

Surely the return of that

asset has to be less.

976

And so I'll consider an

example of an alternative.

977

Let's say you were investing

in a managed futures fund.

978

Well, when you invest in that

fund, you're going to give them a

979

dollar and they're going to take

that dollar and put it in T bills.

980

And they're going to use that as

collateral to run their managed

981

futures trend following strategy.

982

So it doesn't matter whether T bills

are returning 0 or 5 or 10 or 15.

983

The excess return is always the

return of that active strategy.

984

So it doesn't matter

if rates go up or down.

985

And that's true whether these are

what we call cash plus alternatives.

986

So.

987

Long short equity, uh, a lot of systematic

macro strategies, managed futures, or

988

whether they're not cash plus, most

assets or all assets really are things

989

that we talk about in excess returns.

990

What is their return going

to be in excess of T bills?

991

And we generally assume every asset has

a return in excess of T bills or else

992

why would you bother investing in it?

993

Why wouldn't you just invest in cash?

994

And so from that perspective, the

actual level of T bills does not matter.

995

Um, because all we're talking

about is the excess returns.

996

And again, this is something we have

an article written about, uh, that

997

probably explains it a lot better than

I can in 30 seconds to a minute with

998

some nice graphical pictures, but it's

a question we receive all the time.

999

And we think that this concept

is just as important today.

01:00:15,802 --> 01:00:18,022

As it was in a zero interest

rate policy environment.

01:00:18,902 --> 01:00:19,572

Rodrigo Gordillo: Great stuff, Corey.

01:00:19,572 --> 01:00:21,282

I appreciate the answers.

01:00:21,352 --> 01:00:24,032

I appreciate the time and effort

you put into this presentation.

01:00:24,492 --> 01:00:26,942

As Corey alluded to, you

know, any questions that

01:00:26,972 --> 01:00:28,762

you've had, we didn't answer.

01:00:28,762 --> 01:00:30,412

We have answered it on the website.

01:00:30,412 --> 01:00:31,662

So literally go to the insights.

01:00:31,662 --> 01:00:31,782

com.

01:00:32,942 --> 01:00:33,802

Search for it.

01:00:33,812 --> 01:00:38,092

We'll have either talked about it in

the podcast or we have written about it.

01:00:38,102 --> 01:00:41,542

So, um, that is it for today.

01:00:41,552 --> 01:00:44,482

If anybody has any further

questions, please do reach out to us.

01:00:44,482 --> 01:00:48,662

Go to the contact us page on the

website, type out your answer or

01:00:48,662 --> 01:00:50,282

book a meeting for us to chat.

01:00:50,647 --> 01:00:54,127

We'll be, uh, more than glad to get

the team on it and help you out.

01:00:54,637 --> 01:00:58,727

Um, if you wanna, uh, look at the

other assets, other areas to get

01:00:58,727 --> 01:01:02,427

more information, you know, Corey's

Twitter account is always fantastic.

01:01:02,427 --> 01:01:05,607

See Hofstein at, uh, well, I guess, x.

01:01:05,797 --> 01:01:06,377

com now.

01:01:06,407 --> 01:01:08,007

Also, we're putting a

bunch of stuff on LinkedIn.

01:01:08,407 --> 01:01:09,337

I'm at rodgordop.

01:01:10,647 --> 01:01:13,717

Um, And, uh, same thing on LinkedIn.

01:01:13,857 --> 01:01:18,617

We have a podcast, uh, that we are

pushing out every now and then called

01:01:18,617 --> 01:01:22,767

the Get Stacked Investment Podcast,

where we've covered a lot of ground,

01:01:22,767 --> 01:01:27,047

a lot of contemporaneous things that

have happened, uh, a little bit of what

01:01:27,057 --> 01:01:29,227

happened with different stacks in July.

01:01:29,277 --> 01:01:33,227

And so there's, there's a depth of

knowledge there that people can, um,

01:01:33,267 --> 01:01:37,337

can dig into and, uh, you know, once you

start taking the red pill on this stuff,

01:01:37,587 --> 01:01:39,287

it's, it's really tough to go back.

01:01:39,287 --> 01:01:41,317

So we've done our best to try to.

01:01:42,622 --> 01:01:47,362

help you get all the way down the rabbit

hole, get comfort so that you can benefit

01:01:47,462 --> 01:01:52,192

from the things that institutions have

been benefiting for over 40 years.

01:01:52,712 --> 01:01:57,572

So with that, I'd like to thank

everybody and hopefully we'll see

01:01:57,572 --> 01:01:59,582

you again soon in the next webinar.