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What's the Alternative? | Episode 32 | Beyond the 60/40: Navigating the Complex World of Return Stacking with Corey Hoffstein
32 Plays6 days ago
In this episode of What's the Alternative? host Shana Orczyk Sissel sits down with Corey Hoffstein Co-Founder and Chief Investment Officer of Newfound Research, to demystify return stacking, a modern evolution of Portable Alpha that layers diversifying strategies onto existing portfolios using capital‑efficient instruments. They contrast long‑run diversification benefits with the short‑term pain clients feel, and explain how modest, well‑structured stacks can preserve core allocations while improving risk‑adjusted outcomes.
Corey and Shana walk through the role of leverage, practical implementation choices, and sensible sizing heuristics to minimize client friction. The conversation delivers actionable guidance on designing stacks that enhance diversification without triggering performance anxiety, plus perspectives on where this trend is headed in wealth management.
Key takeaways:
- Return stacking lets you add diversifying exposures via leverage and derivatives without cutting core holdings.
- Prudently used leverage can be a diversification tool, not just a risk amplifier.
- Practical sizing: modest, diversified stacks tend to balance benefits and client acceptance.
- Designing for behavioral time, reducing visible short‑term pain, is crucial to keeping clients invested in statistically sound strategies.
Like, subscribe, and turn on notifications to stay up to date on future episodes of What’s the Alternative?
Connect with us!
- Corey Hoffstein on LinkedIn
- Corey Hoffstein on X
- Newfound Research
- Return Stacked ETFs
- Shana Orczyk Sissel on LinkedIn
- Shana Orczyk Sissel on X
- Shana’s Website
- Banríon Capital Management
Investing involves risk of loss. Past performance does not guarantee future results.
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Transcript
Understanding Time in Investing
00:00:00
Speaker
Cliff Asness has as a great line that I'll paraphrase that, that basically we tend to build portfolios thinking of statistical time. We look at these long-term lines and the diversification properties and go over 30 years.
00:00:14
Speaker
This is great. this is these are the This is how we want the portfolio to behave statistically. And yeah, sure, I can stick with that. Behavioral time is like dog years though, right? You want to perform that core benchmark for two or three years to the client, it feels like 20, right?
00:00:30
Speaker
and And there's only, the client can't rent the conviction from you. If the client doesn't have the conviction for that investment, if they don't understand it and they ask you three or four times in a meeting about it,
00:00:43
Speaker
they're either going to force you to sell it or they're going fire you as as an alligator. And so that's what makes these alternatives so very difficult.
00:00:59
Speaker
Hello, everyone, and welcome to another episode of What's the Alternative, the show where we get down into the nuances of alternatives with the experts in the space.
Corey Hofstein's Role in Investment Management
00:01:10
Speaker
And today we have with us Corey Hofstein, who is the co-founder and chief investment officer at Newfound Research, a quantitative asset manager offering a suite of separately managed accounts and mutual funds. And they also have some ETFs that they've launched. Corey is responsible for portfolio management, investment research, strategy, development, so on and so forth.
00:01:32
Speaker
Corey is brilliant. One of my favorite people in this world of investment management. I have a ton of respect for Corey. Anybody who follows me knows this because I mention him often on podcasts, on X, all over the place. I'm a huge fan of Corey Austin, and I am excited to have you on the show.
00:01:54
Speaker
Thank you so much for having me here. And thank you for that very warm introduction. Yeah, well, it's true. And i wanted to have you on here today for one reason.
Return Stacking: The Future of Asset Management
00:02:03
Speaker
At the end of last year, one of the last media appearances I did was on Bloomberg.
00:02:08
Speaker
And they asked me what I thought the biggest trends in asset management would be in 2026. And I said, get really used to hearing the term return stacking because it's everywhere and it's going to be huge in 2026.
00:02:22
Speaker
And for anyone who doesn't know, Corey is the one of the brainchilds. He'll tell you that he's not, that it was a colleague of his that kind of termed it. But Corey's the one who brought it to market and made it mainstream. And so I wanted to have you on today because two years ago, you came on here and we talked return stacking on our other podcast, The Alternative Mason with Brittany Mason. Yeah.
00:02:49
Speaker
and I want to go into it even deeper because everybody's doing it now. Last year was the year of leveraged ETFs. Everything that came out it was blockbuster, historic year of the launching of levered products. and In a way, return stacking is a levered product, but not in the sense of like two times, three times magnified, using leverage in a way that really increases risk. This is a little different. So why don't we start with telling our audience what it is, where the idea came from, and how you have brought it to the mainstream.
Origins and Evolution of Return Stacking
00:03:27
Speaker
Yeah, well, ah so as you said, i will I will not take credit for this, both either the name or the concept. I mean, the the original concept concept for this goes back to the 1980s.
00:03:38
Speaker
I think you can trace it back to PIMCO and some of the institutional work they were doing. And it was long called Portable Alpha. My colleague Rodrigo Gordillo is the one who came up with the name return stacking, but I just happened to be the one who maybe talks the most. And so maybe I've gotten credited with with being the one, but no, no credit really goes to me here other than perhaps evangelizing and trying to bring these products to market.
Integrating Diversifiers with Return Stacking
00:04:02
Speaker
I think maybe the the best way to tackle this is to talk about what problem this is trying to solve. And that will explain sort of how it works, right? So the problem we're ultimately trying to solve with the concept of return stacking for most people is that they they ultimately understand from a theoretical basis that they want diversifiers in their portfolio.
00:04:24
Speaker
But from a practical perspective, getting diversifiers into a portfolio can be very difficult because most people aren't starting with a blank piece of paper. Most people are starting with a portfolio that looks like 60% stocks, 40% bonds.
00:04:37
Speaker
And so to add a diversifying asset class like gold or a strategy like managed futures, or, you know, if you go way out on the spectrum, things like cryptocurrencies, what you first need to do is make room.
00:04:51
Speaker
You have to sell some of your stocks and bonds. So, so diversification becomes this process of addition through subtraction. And it creates two very real issues. The first issue is statistical.
00:05:01
Speaker
And I know you know this one well from from managing portfolios. When you have a stock bond portfolio and you need to add an alternative, you need to make a decision of, well, what am I selling? How much am I selling? What is this going to do to the portfolio? There's there's real numerical statistical issue there.
00:05:16
Speaker
And then the second is behavioral. Even though we can look at the history of these alternatives and see that they have delivered on their promise for the most part, they have gone up over time. They've been on correlated to stocks and bonds. Many provide very attractive returns during those bear markets for stocks and bonds.
00:05:35
Speaker
they They march to the beat of their own drum. And that's why we hired them. But that's often why allocators are fired by their clients, because when stocks are going up, maybe they're not keeping up. And it leads to friction and tough conversations and a real behavioral issue.
00:05:51
Speaker
So that's why what we tend to see when we look at the numbers is that these wonderful diversifying assets don't really end up in client portfolios. And when you look at the category returns, the investment return is quite good, but the investor return is quite bad. There's usually a large performance gap there because people end up trying to market time them. They get in at the wrong times and it's hard for them to hold it structurally.
00:06:14
Speaker
Return stacking tries to solve that by saying, what if instead of making this an either or decision, it's a yes and decision.
Mechanics of Return Stacking via ETFs
00:06:23
Speaker
So just as a basic example, every return stacked ETF that we offer, when you give us a dollar, we're going to give you a dollar of either core stocks and bonds plus a dollar of exposure to some diversifying asset class or strategy.
00:06:40
Speaker
And so what that means is you no longer have to make room in your portfolio. If you were to say, sell some stocks and then buy a fund that gives you stocks plus managed futures, you're getting that stock exposure back and you're getting that diversifier layered on top of the portfolio. And so it totally changes the way in which people can think about adding diversifiers.
Managed Futures as a Diversifier
00:07:01
Speaker
It's no longer this this either or it's a yes and decision.
00:07:05
Speaker
Yeah, I think it's Michael Kitchis that says that being diversified is always having to say you're sorry. And i love that because it's totally true. And you mentioned managed futures. It's probably the most obvious one because managed futures performance is always an outlier. It's so uncorrelated with traditional equities. And having to explain why you own it It's like insurance that way. Like, what am I doing?
00:07:33
Speaker
And there's BTOL, which is one of my favorite ETFs. And when it's not doing well, which is from, it's not rare. It's the same story. Like, why do we own this and not cash?
00:07:45
Speaker
And then I have to remind people, like, do you remember what happened last February? you remember how it was up 30% and the market was down 20? Do you remember that? That's why we own it. Cash can't do that for you.
00:07:58
Speaker
Yeah, but we own, like, now it's down 20%. Like, cash would be but yeah, but then your timing, we don't own enough for that to be meaningful. You know what I'm saying? So, like, it's always having to say you're sorry. It's always having to explain the one thing. And to your point, if you're an advisor and you're doing your client reviews and it's the same thing every time that you're having to explain and it's complicated,
00:08:25
Speaker
And you're not confident in your own ability to explain why you own it and how it works. Then you just want to stop having the conversation. Cliff Asness has a great line that I'll paraphrase that, that basically we tend to build portfolios thinking of statistical time.
00:08:41
Speaker
We look at these long-term lines and the diversification properties and go over 30 years. This is great. this is these are the This is how we want the portfolio to behave statistically. And yeah, sure, I can stick with that.
00:08:55
Speaker
Behavioral time is like dog years though, right? You want to perform that core benchmark for two or three years to the client, it feels like 20, right? and And there's only, the client can't rent the conviction from you. If the client doesn't have the conviction for that investment, if they don't understand it and they ask you three or four times in a meeting about it,
00:09:18
Speaker
They're either going to force you to sell it or they're going to fire you as as an allocator on on their behalf. And so that's what makes these alternatives so very difficult to stick with. We know every allocator I talk to knows the the principles of diversification and understands the benefits.
00:09:35
Speaker
Yet, their portfolios tend to remain woefully under diversified from what's really, quote unquote, theoretically optimal because it's not behaviorally optimal. And that's what matters at the end of the day, right? It doesn't matter what's theoretically optimal. It matters what the client can stick with. And if the client can't stick with the diversification, it's even worse. You shouldn't put them in that portfolio. Yeah. So the question is, can we find a middle ground?
00:09:58
Speaker
Right. Somebody once said, and I wish I could remember because it was so brilliant. it was like, which is the best portfolio for your client? The one they can stick with. And i it's true, but at the same time,
00:10:12
Speaker
These things have real value. You cannot time them. They're impossible to time. You will always get it wrong. It's like buying earthquake insurance after the earthquake.
00:10:23
Speaker
It's like buying flood insurance after the flood. You remember then you you need it. It's more expensive at that point. You buy it then, and then nothing happens for 10 years, and you're like, why do I own this? And you sell it right before the next one for the same reason, behavioral. The behavioral stuff is the hardest part of...
00:10:42
Speaker
Being a financial advisor, as far as I'm concerned it's why I am not one. It is why I am not one. Because during 2008, when I worked at an RIA, I wasn't necessarily an advisor, but I definitely took client calls.
00:10:53
Speaker
And I am not built to be a psychologist. I'm just not built to be a psychologist and have conversations with people who cannot listen to reason and rationality in a time of panic. They just cannot. Try to explain to my dad that he's not losing money if he didn't sell anything.
00:11:11
Speaker
over and over and over again is is the most frustrating thing ever. And this is what advisors do all day long. It's why I'm not an advisor. i always say they do God's work because I am not built for it.
00:11:24
Speaker
Yeah, there's real psychological alpha that advisors can deliver for their clients, right? And it's always hard to think about the counterfactual, well, how the client performed if they were doing this by themselves. But being able to to get them towards that maximally optimal portfolio in theory and find that point where it's, okay, as close as we can get for where they are behaviorally comfortable, that is, that is i think, thing.
00:11:49
Speaker
value that an advisor can deliver, figure out where that is for that client how to get them there. And, and so for us to bring it back to, to what we're talking about today, we think return stacking as a theoretical concept and the, and all the funds that are now coming out that are enabling it for advisors are another tool in the toolkit that advisors can use to get clients towards a portfolio that is more diversified while removing a huge amount of that behavioral friction.
00:12:15
Speaker
Yeah, so you talked about $1 in your 60-40, $1 in managed futures or gold or Bitcoin or whatever. And in order to do that, it's leverage. I know i had Jeremy Schwartz on pod back in November because we announced the partnership between Bonrian and Wisdom Tree. They are launching their own return stacking SMAs and Bonrian is running the alts part of it. And so we talked about this. It's leverage. I think he was saying Cliff Asness, again, has been talking about return stacking without knowing or calling it return stacking for a while. And he talked about like the one and a half times and the ninety sixty And you're talking one-to-one. So tell us how that's achieved because I think it's really important because when people think leverage, they always think, oh my God, leverage is risk. Leverage is awful. You think
00:13:07
Speaker
flashback if you were around back then to the financial crisis and leverage the devil. But there's all kinds of different leverage. There's the leverage that is like octane, ah where you're just using derivatives and you got margin on margin. There's debt, which is inherent leverage, where you're taking a dollar and you're borrowing a dollar and the cost of the borrow is less than the outcome of the what you put that dollar into and things of that nature. So In your portfolios, and when you think about return stacking, how are you achieving that two times or one and a half times leverage?
Leverage in Return Stacking
00:13:46
Speaker
Yeah. So whenever people, what I mean, people are, I think, rightfully wary of leverage, right? If you look at every major financial catastrophe, leverage is usually at the scene of the crime.
00:13:57
Speaker
but it's rarely there alone. It's normally there with over concentration risk and illiquidity. And those things together are just a very dangerous combination, right? But leverage on on its own is an amplifier.
00:14:11
Speaker
You can use it to amplify return, And if you're not careful, you can use it to amplify risk, right? You can think of these two times or even people trying to do it three times or five times products, right? If you have a two times Apple ETF, you're going to magnify both the return and the risk.
00:14:28
Speaker
And then for people who get in the weeds, you start to think about what that does to compound returns when you're magnifying both and and you end up with a lower expected compound return than I think most people would expect. When you think about using leverage for diversification though, you can use it to introduce a new return stream, being additive in your returns, but not necessarily multiplicative in your risk because the thing you're adding is different.
00:14:55
Speaker
So what's always interesting to me about leverage is people have ah this aversion to leverage in their investments, but most people incorporate leverage and in fact, return stacking to a meaningful degree in their personal lives. yes A lot of the mass affluent that advisors work with tend to own a home and have a mortgage, and they also have an investment portfolio.
00:15:17
Speaker
That is a form of ah when you take a look at the holistic household network, that's a form of return stack, right? Because one of the choices was, well, you take all your money and you buy a house and you have a single asset that you have no debt on.
00:15:32
Speaker
Or what you do is you say, well, let me get a mortgage, which is a form of debt by this house asset. And then I'm gonna use the leftover money to buy a portfolio. Well, when you look at that at a household level, now you have two assets, your house and your investment portfolio.
00:15:48
Speaker
And you got there by using some leverage. But people are comfortable with that because typically houses and investments, they zig and zag at different times. And so there's, there's a degree of comfort to, to return stacking at the household level.
00:16:01
Speaker
We're advocating for the same thing, just within the investment portfolio to introduce other diversifiers. So how do we do this? That was a long winded way to get back. And I apologize back to your question, but I didn't want to set the table with that. There are many, many ways in which this can be done within an ETF structure. The easiest way to to do it is with capital, that we'll call capital efficient derivatives. These are things like futures contracts or swaps that you can have with a bank that are going to give you a dollar of exposure, but you might only have to put up, say, 10 cents of collateral.
00:16:34
Speaker
Because what's going to happen is every day you're going to true up the gain or the loss. And normally most things you're trading aren't moving by say 10%. So if you've a dollar of investment dollar of exposure and it moves say a 1%, your collateral may go to up or down 1%. And then you're just managing that collateral. And so,
00:16:52
Speaker
You're able to get extra exposure in doing that. And then what you do is, let's say I want a dollar of gold. Maybe i I put up 10 cents of collateral to buy a dollar of gold exposure through gold futures. The other 90 cents of my dollar, I can buy, say, the S&P 500.
00:17:09
Speaker
And now I've got close to a dollar, a dollar. You have to do a little bit more engineering to get perfectly to a dollar, a dollar. But that's that's the basics of it. You're typically using some sort of capital efficient derivative to get you a whole bunch of your exposure, which frees up your cro capital.
00:17:23
Speaker
The same way you used a mortgage to free up your capital after buying your home to invest in your portfolio. So so same sort of portable concept there. Yeah, you say portable.
00:17:36
Speaker
Portable alpha is one of the old terms that encompasses this to your point earlier about the concept not being particularly new. It's just become more mainstream and the terms catchier.
00:17:48
Speaker
But you have... a suite of products. So you have, to your point, some traditional 60-40 plus managed futures, but you also have return stacking with things like Bitcoin and gold, right?
Expanding Return Stacking Product Offerings
00:18:04
Speaker
And assets that zig and zag themselves.
00:18:07
Speaker
Can you talk a little bit about the expansion of the opportunity set with this concept of return stacking? Yeah, so when we wanted to bring this to market, and one of the just the business decisions we made was the clients we had historically worked with were people like yourself who who build portfolios, right? And people who build portfolios typically don't want the ad the asset manager to be prescriptive in this is the total portfolio solution. What you want is building blocks. And so for us, what we wanted to do is make sure all the building blocks followed a very similar formula.
00:18:44
Speaker
formula, right? Give us a dollar. We're going to give you a dollar, either stocks or bonds, plus a dollar of some sort of diversifier. And it makes the math very easy for when you're selling stocks or bonds for what you're buying. So as an example, our RSBT ETF gives you a dollar of core bonds plus a dollar a trend. RSST gives you ah a dollar for stocks plus a dollar of trend falling.
00:19:06
Speaker
RSBA, a dollar of bonds plus a dollar of merger. arm As you mentioned, we also have one gold and Bitcoin. RSSX, a dollar of S&P 500 plus a dollar of a mix of gold and Bitcoin.
00:19:18
Speaker
The opportunity set of doing all this is really quite large. In theory, you can sort of mix and match anything you want. It's a question of should you, right?
00:19:30
Speaker
One, should you from an investment perspective? Two, should you from a commercial viability perspective, right? We we are running ah ultimately a business here and we do want clients to utilize these products. But the other part there from an investment perspective is Just because something can be done doesn't mean it's going to be done in a tax efficient or efficient manner or in a manner where your expected returns are meaningful after all the implementation implementation costs and slippage. And maybe there are ideas that you could implement that would work fine in most markets, but might be catastrophic in certain markets. and And you don't want to have that type of risk. And so on paper, in theory, you can really do any combination of any assets. Mm-hmm.
00:20:12
Speaker
within the realm of what's legal within an ETF and a 40 act vehicle that the SEC will allow. But it's sort of like you get to a point of what's prudent, right? what What does make sense to combine and what is that combination going to look like? And does it solve the problems we're ultimately trying to solve for clients? and And just maybe i can I can end with a point. you know If I give you a product that's 100% and 100% The return of that product is going to look very different than a product that's a hundred percent bonds plus a hundred percent gold.
00:20:43
Speaker
Both of those products can be used by an allocator in a very similar manner of overlaying gold to the portfolio. But the return of that line item is going to look very different. And that line item return creates an experience for the end investor, right? That goes back to the behavioral frictions we talked about. So one of the things we often think about is what should we combine within an ETF?
00:21:04
Speaker
such that the hopefully the two things are zigging and zagging, in tandem. They have similar volatility profiles. It's not going to stand out too much. The overall volatility of the ETF doesn't get too high. That sort of stuff goes back to, it's more craftsman than technical, but it goes back to understanding for the advisor, we're not trying to create more friction than they already have in adopting these solutions.
00:21:27
Speaker
Yeah, I think that's interesting. You started this conversation by saying, like, where do the dollars come from? That problem doesn't completely go away with this solution. To your point, the bond gold versus stock gold, you're still having to choose which one to pair it with.
00:21:44
Speaker
And whenever I have a conversation about how do I fit alts into a portfolio, the way I do it doesn't have nice, clean numbers.
00:21:55
Speaker
So I always explain it as if I were going to do it and my client gave me a million dollars, I would literally segregate them into sleeves.
00:22:06
Speaker
So eight hundred k goes into And then goes into alts because then i have alts. but my sixty forty is like fifty s two point, you know what saying? It's not a clean number. And that makes it hard. The only clean number is the alt side of the portfolio. But that's how I've always approached it.
00:22:28
Speaker
And most advisors want to just know like, how much no, I need a clean number. Where do I take it? And on the flip side, there is no clean answer. There's no, this is how much you take from equity. This is how much you take from bonds. It doesn't involve a whole bunch of decimals.
00:22:45
Speaker
And so it gets hard from that perspective. So then they ultimately end up taking 10% off each, which is not equal you I always suggest in most cases, taking it from bonds is gonna have the better outcome than taking it from stocks.
00:23:02
Speaker
Cause the risk return profile of alt typically has a better return with a little more risk than bonds. So the risk adjusted return numbers, or they tend to have similar information ratios. And so that inherently makes more sense to me. But to your point, I'm making a decision based on statistics.
00:23:25
Speaker
And some people don't want to have to justify based on statistics to the end client, because then you're getting into weeds and not the story is no longer clean. And then when questions come up, it gets worse. So when you think about the products, how are you thinking about those dynamics? Are there statistical things you'd like to see in that pairing that would make it optimal when you're thinking about it?
00:23:52
Speaker
Yeah. So there's the sort of two ways I can, I can answer that. And by the way, that all the stuff you just in enumerated is the classic struggle we see for every allocator we talk to, which is, I think you hit the nail head. So many people go with the 60, 40 and just go right. I'm going to scale 50, 30, 20, because the math is easy. The numbers are easy.
00:24:11
Speaker
It's approximate enough. They don't want to be as precise because at the end of the day, it's all estimation anyway. So if it makes their life easier to do 50, 30, 20,
00:24:19
Speaker
it's kind of justifiable for them with, with how shrouded in uncertainty, everything is to get to your question. There two branches here. One there's within the product itself. Right. And then the second is how are we thinking about this at the portfolio level? Right. So within the products we build themselves, you know, as I mentioned, the things we, we look for first and foremost, we want to combine things that we expect to be uncorrelated. And, and ideally there's a structural reason they're uncorrelated. So when we,
00:24:46
Speaker
Take, for example, like our prior flagship fund, again, is RSST. Every dollar you give us, we're going to give you a dollar of S&P 500 plus a dollar of a managed futures trend program. That managed futures trend program is going to trade global equity indices, global bonds, commodities, including energies and metals and and currencies from around the globe.
00:25:04
Speaker
And it's going to go long and short. And it's going to do that based on trend following signals. You, while that, the the correlation of that strategy over time can vary to equities, right? If equities are in a very strong bull market, you might see that strategy pick up equities. They're in a very bearish market. You might see it go short. You get this time varying correlation.
00:25:25
Speaker
you You expect there to be over the long run about zero correlation and a structural reason why during a prolonged bear market, that strategy wouldn't behave like equities.
00:25:37
Speaker
And so we like that pair. And then we say, okay, how hot should that trend strategy run? Cause that's a decision you can make. It can be a low volatility trend strategy, or it can be a very high volatility trend strategy.
00:25:50
Speaker
And there are some regulatory restrictions here, but we go, well, let's choose a sort of ah a spiciness level that matches equities or similar to equities so that the overall spiciness of of the fund is going to be a little higher than both.
00:26:05
Speaker
But what you find is that on any day to day, neither trend nor equities is typically driving in the driver's seat more than the other.
00:26:16
Speaker
They're both equally contributing over time. And hopefully that means the equity curve looks smoother over the long run than either individually. And to us, that's like a nice optimal mix in terms of being a product that delivers a unique return source, gives you the beta you want.
00:26:34
Speaker
but also is going to be a line item you can hold. Then the question is, okay, or you have this ETF that for every dollar I invest, I'm going to dollar of stocks and a dollar of trend.
00:26:44
Speaker
How much of that should I put in my portfolio? right yeah Going back to the 60-40, do I sell all my 60 and put it all in that fund? And then what am I going to end up with? I'm going to up with 60 stocks, 40 bonds, and 60 trend.
00:26:59
Speaker
For some people, that's probably fine. For the vast, vast, vast, vast vast majority of people, that would be a disaster, right? the The trend would be so big and drive so much return at the portfolio level, they wouldn't be able to stick with it.
00:27:13
Speaker
What we generally find is when we talk to advisors and and help consult in building portfolios, a stack of about 20% is the max people can tolerate. Mm-hmm.
00:27:25
Speaker
Ideally that stack is not just one alternative, right? We want to talk about adding trend and a little bit of gold and some merger arbitrage and other diversifying assets and strategies within that stack.
00:27:37
Speaker
And ideally none of these line items are more than 5%. And I keep coming back to this line item thing, but it's just, it's one of these really important points where clients, even though we want them to look at their portfolio holistically, tend to go through quarterly reports line item of by line item and things that stick out are the things that get the questions.
00:27:57
Speaker
And so if you have something in there, that's a little weird that keeps sticking out, it's going to end up getting kicked out of the portfolio. If you keep it small enough though, it can, it can be a little weird and it gets a little bit more leash.
00:28:07
Speaker
And so we tend to say, you want to build about a 20% stack. That's big enough to have an impact, but not so big to overwhelm the portfolio. And you want to do it a couple different alternatives, a couple different strategies, and you probably want each thing to be somewhere around five to 10% max as I'd align on a basis.
00:28:24
Speaker
So you've basically just made the case for why people should be using the boary and Wisdom Free Bonner and Select Alternatives ETF SMA with Wisdom Free. So thanks for that, because that's exactly what we do. You're a friend. Jeremy's a good friend. Jeremy was there at the beginning when all this stuff launched. So if I don't get the business, at least it can go to you guys. Yeah, so you just made the case for me. Thank you. Because that's exactly what that model is. It's the combination of a bunch of different alternatives.
00:28:52
Speaker
So in in this case, we have some managed futures, we have some inflation, like global macro kind of stuff. We have... market neutral, long, short.
00:29:04
Speaker
We have some Bitcoin in there. We got some fixed income arm in there.
Strategic Applications of Return Stacking
00:29:08
Speaker
So that's exactly what that model in that portfolio is. You can find now on Fidelity and Schwab folks. That's a push product, but you set me up for that. That said, let's like let's pan out for a second.
00:29:23
Speaker
And I have been talking about how Instead of talking about the 6040, we're going to talk about the 9060. Can you explain the math behind that and why 9060 is the return stacking version of 6040? Yeah.
00:29:40
Speaker
yeah And i hope I hope when you had Jeremy on, he gave the full history here, but there's a funny history with this 9060 product, which is ultimately what WisdomTree launched, which is that it was actually born out of a Twitter conversation.
00:29:54
Speaker
So as it happened between myself and two anonymous, one of them pseudo anonymous, but I don't want to, if they don't want to dox themselves, I won't dox them. Two anonymous Twitter users where we were talking about using a 90 60 funds to free up capital. So the 90 60 is, is one and a half times 60, 40, it's 90% equity, 60% bonds. And the idea here is if you were to take for every dollar, if were to put two thirds of your money in a 90 60 fund, you would get 60, 40 exposure, right? Two thirds times 90 is 60, two thirds times 60 is 40. But what you're left with is 33 cents of every dollar with which you can do anything.
00:30:33
Speaker
Right. And if you leave it in cash, you basically get your 60, 40 return back. If you invest it in gold, what you end up with is a 60, 40, 33, where you get a 33% overlay of gold in your portfolio.
00:30:46
Speaker
And ideally instead of doing it with gold, you would do gold and a mix of other things, right? All the things you mentioned of diversified set of alternatives. And in the idea there was originally just around capital efficiency. Mm-hmm. Funny enough, I was in a Barron's round table about the future of ETFs in 2017. I said, I think capital efficient ETFs are the future.
00:31:05
Speaker
Jeremy, much smarter than me said, well, I agree. and I'm going to launch a whole bunch of product on it. Brought that article plus the Twitter conversations with the team at WisdomTree. And they launched a product that I don't know why I didn't launch. So kudos to them. Jeremy's a great friend and it's a great suite of products. and I love what they do.
00:31:23
Speaker
As you mentioned, though, of course, Cliff Aspenis beats everyone to every idea. turns out back in like 1992, he wrote a paper about why someone should invest in a instead of 100% equity. So the nothing nothing in investing is ever really all that original, as it turns out. We're just rediscovering the same things that greats have already done decades before. But that I think of as a capital efficiency tool, right? Mm-hmm.
00:31:47
Speaker
And you compare it to like what I talked about before the RSST, where we have the alts built in the 90 60 is not so much about stacking bonds. People can use that, right? If you're a one hundred percent equities, you could buy levered 60 40 and arguably over the long run, it it should give you a lift in in return and risk. It's just a more diversified portfolio levered up that goes back to basic portfolio theory concepts.
00:32:13
Speaker
But the real To me, the the real benefit of something like 9060 ETF, NTSX is the one that's the most popular WisdomTree, is that it allows you to stack whatever you want. It's a choose your own adventure tool, right?
00:32:29
Speaker
So like you mentioned, you can add all these diversifying alternatives to the portfolio that might be exist in standalone funds. The other thing that fund can be used for is most advisors need to have some cash sitting around. They don't want cash drag. Great. You can add that and and make up for for the ah beta that you're missing.
00:32:49
Speaker
Some advisors like to just have some cash around to act opportunistically, or they get capital calls for private funds and they don't want cash drag. Great. A tool like that. We offer one as well. Dollar global equity, these dollar bonds, RSSP.
00:33:02
Speaker
i To me, it is... the Swiss army knife of return stacking. And the thing we haven't talked about yet that I think is really powerful is we keep talking about diversification and people always think of diversification as a risk management tool. To me, return stacking is also opens up the door to a whole new way of trying to outperform the benchmark.
00:33:22
Speaker
Yep. right Because it is we know know the stats inside and out. You go look at the speed bill reports. It is almost impossible to find alpha in U.S. equities.
00:33:34
Speaker
And this will surprise people. It's also almost impossible to find alpha in U.S. bonds. Everyone thinks bonds is where the alpha is. Go look at the speed bill report. the The numbers are just as bad. Bond managers underperform their benchmark about as often as equities.
00:33:47
Speaker
It's just they're hard to find alpha. I always say to people, what do you have more conviction in? That you can pick stock and bond managers that can consistently deliver alpha or that you can just find a set of alternatives that you think is going to beat cash over the long run.
00:34:02
Speaker
What's better for most people, like have a very low cost passive 60, 40 with 10% gold stacked on top over the last 20 years, or pay a lot to a bunch of managers who might be tax inefficient and have a coin flip of delivering alpha.
00:34:18
Speaker
Like, I think the former to me is a lot more appealing, especially when you say, well, I don't have to just do it with gold. I can find five or six alternative assets and strategies that I have conviction in.
00:34:29
Speaker
Yeah. So as you're talking, when I worked at CLS, which is now called Orion or Brinker, I don't know, it's not CLS anymore, but it's part of Orion. We had this concept of risk budgets and it's kind of born from the idea of when I worked at Mercer and I worked for the investment management arm, everything was LDI, liability driven investing.
00:34:53
Speaker
And the whole point of LDI is pension funds have a risk budget and As you get closer to being able to generate enough income in the portfolio from the the value of the portfolio with just the income from low risk assets, you become more and more of the low risk asset. But you got to get your portfolio there through growth. And so the whole concept of LDI.
00:35:18
Speaker
is to look at the portfolio, figure out what your risk budget is, and then allocate the risk smartly. And so the reasons why institutions use a lot of alts is because they look at a risk budget. And if they use an alt that has a risk adjusted return or an information ratio that's high, they can take that extra money, that dollar and equity and invest it in something that has a higher probability of excess return.
00:35:47
Speaker
And in essence, that's exactly what you're talking about is the same idea. And so this concept of return stacking is really just risk budgeting with Octane.
00:35:59
Speaker
And I've always been a believer of risk budgeting. And when I was a CIO at an aggregator, I i ah used the concept that CLS had on portfolios at that RIA.
00:36:12
Speaker
And the problem was that no matter how much we tried to turn the risk up, the alts always made it low. It just did. There was no world in which we could dial the risk up enough to get the risk to the budget that we had, unless we went really on the risk spectrum. But I guess that's the beauty, right? That's the beauty of it. You said you have two-thirds of the portfolio in a traditional, and then you can take whatever you want with the the remaining $0.33.
Aligning Return Stacking with Risk Budgeting
00:36:45
Speaker
And I would argue that you take 20 cents of that and you put it in alts and then you take that 13, maybe you put some in cash, but maybe you take that 13 and you give yourself a risk budget and you throw that into a high risk, but high return asset like a Bitcoin. That's the whole argument Matt Hogan makes about Bitcoin.
00:37:06
Speaker
You don't need to put a lot of money in Bitcoin to get a lot of return from Bitcoin. And you can generally... ah end up with a lot of potential for excess return, but not a lot of potential excess risk. So I think you bring up with like this really important point that we see happen with allocators all the time, especially with alts. And we talked about the problems of trying to make room. The other problem is a lot of alts are historically low volatility and they're going to be diversifying.
00:37:37
Speaker
And so what happens is when you take that 60, 40 and you carve out room and you add lower volatility alts that are uncorrelated to the stocks and bonds, it brings the volatility profile of the entire portfolio down below the target risk level you might want.
00:37:54
Speaker
And maybe you can match the same expected return, but to get an actual uplift in expected return, you do need to apply some leverage, right? That goes back to a lot of the core portfolio ideas from from Sharp and CapM and all that sort of stuff. Like that again, none of this is novel and new. it's It's just reapplying and giving people the tools to actually do it now. And I think one of the great examples is like merger arbitrage.
00:38:19
Speaker
Merger arbitrage is a strategy that's been around for a really long time. Warren Buffett famously used it with great success in managing his portfolio. It's a strategy where when a company, there's a public announcement that one company's buying another, that second company tends to jump towards the acquisition price, but not all the way. There's a little bit of spread there. And that spread price is in the uncertainty of whether the deal is going to fall apart and the time remaining in getting that deal done. There's a time value and money aspect there.
00:38:48
Speaker
And what you can do is you can step in and buy the deal at that point if you have a high degree of certainty that the deal's going to close and you capture that remaining spread.
00:38:59
Speaker
Historically merger arb over the last say 25 years has delivered anywhere between 200 and 300 basis points over catch, right? So that's a very attractive risk premium. There's a strong argument why it should persist because it is a risk. The deal could fall apart. That shouldn't disappear. This isn't behavioral.
00:39:18
Speaker
It's, they're all very idiosyncratic deals. So, so how the strategy performs doesn't tend to look like stocks, bonds or credit. So very attractive. The problem is that excess return floats on cash.
00:39:31
Speaker
And so in a decade, like the 2010s, where the return of cash was nearly zero, the return on those types of products was 200, 300 basis points a year. Just not that attractive in total return.
00:39:45
Speaker
They're getting more attractive now that cash rates are higher. Right. But the thing I, I bring up is, well, wouldn't it be really interesting to take merger ARB and just stack it on your portfolio. Right. Where you don't have to give up the stocks or the bonds and make this either or decision. Like if you want that risk premium as a return driver, man, I'm a lot more confident that I'm going get a positive excess return out of, out of merger ARB over the next 10, 15 years than I am.
00:40:10
Speaker
finding an equity manager that can deliver alpha, right? And that's that's how I think about all of this is there's some really interesting lower vol strategies like merger ARB that now suddenly can find a place in the portfolio a lot more to me, a higher conviction place in the portfolio because you can stack them and and you don't have to make room for them. Yeah, managed futures is another perfect example of that.
Behavioral Challenges in Alternative Investments
00:40:34
Speaker
Managed futures just inherently is almost perfectly negatively correlated to equity markets. But since equity markets go up 70% of the time, managed futures tend to be the thing on the line item, as you pointed out, the clients like fixate on. And then exactly at the wrong time, you sell it, and then it pays for itself, and you missed it.
00:40:56
Speaker
To your point, the behavioral aspects of portfolio time targets. But... That's another perfect example. And there's a number of them. And I talk about BTAL, the equity market neutral long short beta fund, where they're long low beta and short high beta and the research.
00:41:18
Speaker
The thing about market neutral and the thing I always like to tell people is market neutral is much more effective when the the relationship between what you're trying to neutralize is persistent.
00:41:30
Speaker
right? Because AGF tried to do the same concept on a number of different factors, and only one that worked was the beta one. like They tried to do it with value, but valuations are literally rolling the dice. There is no persistence to the relationship there between high PE and low PE. There just isn't. In fact, I would argue that High PE stocks tend to stay at a high PE because they got momentum.
00:41:58
Speaker
And low PE stocks are usually low because there's some sort of issue and there's a value trap. And then you also have the problem with anything that is cyclical tends to have...
00:42:12
Speaker
low PE at exactly the time you don't want to own them and high PE at exactly the time you do want to own them. So that relationship is not persistent and not consistent enough to do a market neutral approach. And they tried some other things too, but the market neutral beta, that relationship is persistent and research low vol as a research concept has been around forever.
00:42:34
Speaker
It's an anomaly. It shouldn't work based on cap M and all of that low vol is the thing that doesn't align with that theory because you should get paid for the risk.
00:42:48
Speaker
But since low vol outperforms more than high vol does, you're not actually getting paid for the risk of that high vol. And that relationship persists, which is why that fund has been able to be successful and predictable.
00:43:01
Speaker
And I always say, that's the thing when you're building portfolios that's the most important when you're picking the blocks. You got to understand the predictability and the likelihood of how the behavior of that block is over time and how that behavior interacts with the behavior of other blocks in the portfolio.
00:43:22
Speaker
well let's stick with btol because i think it's a great example of how to put this all together right if you've got a 60 40 and you want to use something like btol which has historically during market drawdowns provided a huge positive return because of that beta asymmetry right it is net negative equity beta right but because it's a dollar neutral in each leg, over time as the market goes up, it tends to drift a little bit lower. And i my numbers here won't be perfect, but I think over the life of BTOL, the total return is negative 2% annualized. That is almost exactly correct. It's like...
00:43:58
Speaker
Not quite 3%. You're absolutely correct. So let's call it negative 2%. Right. right If you have to make room, right, in your portfolio for BTOL, and let's say you just sell in proportion of your 60-40, and your expected return for your 60-40 is, let's just say 5%. That means you're selling something you've got a positive expected return of 5% for to make room for something with a negative expected return, with an expected return negative 2%. That's 7% gap.
00:44:27
Speaker
that the diversification benefit has to make up for. That's a huge gap. And so what that means is when I say the diversification benefit has to make up for it, I mean, when the market crashes and BTOL spikes, you are perfectly timing the rebalance to be selling BTOL down, buying the 60-40 and getting the benefit of that of that rebalance. That's a, that's a tough market timing call to have to make every single time to overcome a 7% expected return threat.
00:44:58
Speaker
What if instead you could just overlay BTOL? Right. Right. You can use the the capital efficient tools that either we offer WisdomTree offers and say, well, I'm going to put, I'm going layer BTOL, some BTOL on my portfolio.
00:45:11
Speaker
Now my expected return is just negative 2%. Not, there's no, there's no opportunity cost there. Right. In the same way. um um I'm glossing over some financing stuff that's also very important here and in terms of how all this works. and And we can, you know, maybe later in another episode of of In the Weeds, we can get into that. Yeah. but but the But it's different, right? and And the opportunity cost there is very different. And so...
00:45:36
Speaker
what The point I'm trying to make is when you overlay this stuff, it's it's ultimately um that opportunity that you're not having to come up with that opportunity cost the same way. yeah And so it it really opens you up to thinking about building portfolios, in my opinion, in ah in a less constraining way. It allows tools like VTOL to find a more natural fit in the portfolio.
00:45:57
Speaker
Yeah. And you also point out the issue with just looking at, you know, annualized returns on a piece of paper because in real life, you don't invest a dollar and then never touch it for 10 years.
00:46:12
Speaker
There's a reasonably good chance that that dollar is actually at the end of the day, like 75 cents of the original dollar because you've been doing some like profit taking and so on over time. um And that's why a fund like BTOL can have a negative expected return of negative 2%.
00:46:29
Speaker
And yet when I include it in the model that I run, I've never not owned BTOL. I might trim it around the edges. i might have it at 20% at sometimes and 15% at others, but I've never not owned BTOL.
00:46:46
Speaker
But somehow I've managed to have an expected return for my total portfolio, which is only alts, which is not substantially far off from pure equities with substantially less risk, even though I have a not small amount of money in a negative expected return product.
00:47:08
Speaker
And everybody challenges me on that. And all I can say is I maintain discipline to the rebalancing effort. And I do make some tactical allocation changes at times.
00:47:21
Speaker
When it really works, I bring it down to 15. And when it hasn't been working for a while, i bring it up to 20. And my portfolio expected return for BTOL is actually positive because of that.
00:47:35
Speaker
And I could replace it with cash. But then when the market tanks, I don't get 30% return on cash. But I might with BTOL.
00:47:49
Speaker
And the other thing about BTOL is it's it's not even perfectly negatively correlated like managed futures because BTOL does actually work when equities are going up. I think, what was it, 18 or 19? It did just as well as the market because the market was driven by low vol.
00:48:07
Speaker
So I call it low vol and steroids. But your point is the point that this entire episode is really about, which is These products have real value, but the decision to invest in them, how and how much, is inherently complicated.
00:48:27
Speaker
And most investors
00:48:32
Speaker
don't have the desire to have this conversation and be thinking about that. It's too much bandwidth to put into something.
00:48:44
Speaker
And then the advisor also does not want to, you and i are complete dorks and we can talk about this for hours, but I assure you a lot of people would be put to sleep by this conversation.
00:48:58
Speaker
and and And so you don't want to have it all the time. um And I think that that really brings in essence the key message to this entire discussion, which is that this concept of return stacking helps simplify the decisions as it pertains to these really difficult statistical debates that you have to have if you don't do it.
00:49:28
Speaker
So before I let you go, what do you think, since we started the episode off with this, are going to be the key trends in asset management in 2026.
00:49:44
Speaker
Well, i I will start by, you know. You can talk your book. Yeah, I'll talk my book. I mean, look, we we are...
The Future Adoption of Return Stacking
00:49:52
Speaker
I pretty much dropped every other line of business a couple years ago to launch the return stacked ETF suite. We've gone from zero funds to seven funds, zero in assets to about 1.2 billion today.
00:50:04
Speaker
Morningstar has created a whole new category for this suite called multi-asset overlay. We launched the first 100-100 equity trend ETF. At the end of q one I think there's going to be 10 similar funds in the US, Canada, and Europe.
00:50:20
Speaker
I don't see this going away. Portable alpha at large has seen a huge resurgence and and renaissance in in the institutional space. And I think what we're seeing is a parallel growth in the wealth space that these tools are making their way into the wealth advisory book. And I think we're just getting started the same way.
00:50:39
Speaker
Buffered products went from non-existent to a hundred billion dollar category. I expect return stacking concept products to do the same over the next five to 10 years. So I think that's huge.
00:50:51
Speaker
I think the other trends we're going to see, i mean, you know, again, I don't like to prognosticate macro, but I think we are seeing a lot more interest in, especially this we're talking in January here with silver and gold and everything going on there. A lot of people rethinking their books going,
00:51:06
Speaker
Okay, do we have a de-dollarization trade? Do we actually have to think about international diversification? Do we have to think about diversification to hard assets? 2022 was sort of the scare. I think people then went, oh, we're fine. i think last year, as i at least have started to see in the allocators that I consult with, a bit of a sea change.
00:51:27
Speaker
Back to what I saw in my career in 2007, right? Whereas it like every portfolio I looked at in 2007 had gold. And then it went a decade where I never saw gold again. Now I'm seeing gold. And I think we will continue to see, I hate to say price sets narrative, but as long as those assets are performing and you're and you're seeing continued geopolitical volatility, i think you will continue to see people start to increasingly diversify their portfolios away from core US stocks and bonds to help manage some of that risk.
00:52:01
Speaker
Yep. Makes sense. It totally makes sense. And the buffer analogy, I think, is a good one. i felt like last year was the year of leverage and crypto-related buffer products. They were freaking everywhere. I have opinions on buffer and...
00:52:16
Speaker
I want to have a guest on here someday that will debate me on it because I think it'd be really interesting. And I'm curious if they could change my mind on Buffers because I love when people can get me to change my mind. It's yet to happen, but but I think you're totally- My guess is we're on the same side of the fence on Buffers. Yeah, probably. So maybe I'll listen in and get my mind changed as well. Yeah, I think it's exactly correct.
00:52:39
Speaker
And I think the reason we're seeing the rise in alternatives as a whole is A, accessibility is completely opened up and now is a conversation that can be had. i think the ultimate challenge that advisors and investors face in the alt space, whether it be ETFs, mutual funds, integral funds, or private placements, as the custodians continue to make it hard to trade them,
00:53:06
Speaker
If you try to, I don't know how it is with your ETF, but a lot of alt ETFs, if you try to trade them at the custodial level, they make you change your risk tolerance settings. Yes. Which is bonkers to me. And then a lot of people, once that happens, they freak out and just don't even proceed. And then you have what's happening at Fidelity right now where they just decide, yeah we're just not going to take in any new assets to any long, short SMAs anymore, which is fun.
00:53:34
Speaker
So Alts as a whole is an uphill battle, but to your point, continues to make it. Despite all those hurdles, you've been able to raise a billion dollars because the demand is there. And ultimately, the demand wins like anything else.
00:53:48
Speaker
So I completely agree with you on your assessment there. i think you are totally correct. And I'm glad that I got to have you on the pod because this is a conversation that I think people will find interesting, especially considering the growth of these products and The more of them that come out, the more questions that there are. And hopefully people find this podcast and use it as a way to get a masterclass on return stacking with one of the best in the business. So thank you for being with me. I really appreciate your time. Absolute pleasure as Absolute pleasure. Thank Shana.
00:54:23
Speaker
And thank you everyone for watching. As always, remember to like and subscribe so that you never miss an episode. And if you have a topic that you would like us to take on on another episode of What's the Alternative, feel free to leave in the comments.
00:54:39
Speaker
I am Shana Orzek Sissel, the founder and CEO of Boundary and Capital Management. And thank you for joining us for this episode of What's the Alternative.
00:54:50
Speaker
Let's go, bring it.
00:54:53
Speaker
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00:55:20
Speaker
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Speaker
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Speaker
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Speaker
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Speaker
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