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The Alternatives Mason: Building Alts Knowledge Brick by Brick | Episode 9 | Return Stacking Featuring Corey Hoffstein
8 Plays10 months ago
Welcome to The Alternatives Mason: Building Alts Knowledge Brick by Brick. Banrion Capital Management uses technology to help independent advisors scale and educate themselves on alternative investments. Since education is such a big piece of the Banrion mission and business, we are excited to kick off this series to dive into the nits and grits of the alternatives space. Episode 9 "Return Stacking" Features Corey Hoffstein, co-founder of and Chief Investment Officer at Newfound Research. Founded in 2008, Newfound Research LLC is a quantitative investment and research firm dedicated to helping investors pro-actively navigate the risks of investing by unlocking the benefits of diversification through Return Stacking™. The firm manages a variety of alternative strategies and capital efficient solutions that allow investors to implement Return Stacking™ concepts. At Newfound, Corey oversees quantitative research and overall corporate strategy.
In addition to his role at Newfound, Corey is passionate about research, his work on liquidity cascades & rebalance timing luck has been published in industry journals. He is a highly sought after industry speaker, media contributor and the host of the "Flirting with Models" Podcast.
Corey holds a B.S. in Computer Science from Cornell University and an M.S. in Computational Finance from Carnegie Mellon University.
Connect With Corey HoffsteinLearn More About Banrion: Banrion Capital Management
Follow Brittany on 𝕏: @Brittany_Mason
Follow Banrion on 𝕏: @Banrion_Capital
Subscribe to our YouTube Channel: @QueenofAlts
Important Disclosures:
The opinions expressed on the “The Alternative Mason Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results.
The guests featured on this program may be participants on Banrion Capital Management’s platform. As such Banrion may receive payment for their participation as a platform partner.
Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
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Transcript
Introduction and Podcast Overview
00:00:01
Speaker
Welcome to the Alternatives Mason Podcast with host Brittany Mason, Chief of Staff at Bonner & Capital Management. You'll learn how to build alternative knowledge brick by brick. Bonner & Capital Management uses technology to help independent advisors scale and educate themselves on alternative investments. Since education is such a big piece of what we do, we are excited to kick off the series to dive into the myths and bricks of the alternative space.
00:00:29
Speaker
My name is Brittany Mason. Welcome back to the Alternative Mason podcast where we are building alt knowledge brick by
Guest Introduction: Corey Hofstein
00:00:37
Speaker
brick. I'm very excited because we are kicking off our 2024 season with a very special guest. I hope everyone had a happy new year. You feel refreshed and excited for the new year we have ahead of us. I'm wishing everyone an abundance of blessings for 2024.
00:00:53
Speaker
So we have a very special guest today, our first one on the show for the year, Corey Hofstein. Corey Hofstein is the chief investment officer and the co-founder of Newfound Research, a quantitative asset manager firm based in Boston.
00:01:09
Speaker
on August 2008 with a bachelor's computer science degree from Cornell University and a master's in computational finance from Carnegie Mellon University. His educational and professional background has shaped his focus on systematizing investment ideas with a strong emphasis on quantitative systematic implementation.
00:01:30
Speaker
Hofstein's portfolio management approach centers on prioritizing effective risk management over alpha, stating, quote, while other asset managers focus on alpha, our first focus is on managing risk.
Personal Insights: New Year Reflections
00:01:43
Speaker
Thank you so much, Corey, for joining us today. Super excited to have you. Thank you for having me here, Brittany. Happy New Year's.
00:01:51
Speaker
Thank you. What did you do for the new year? Any special plans or anything? Not for the new year. My wife and I were blessed this year to have a young new baby in the house, which means that we were in bed, I think, by 10 p.m. And my wife woke up the next morning saying, I can't believe there were fireworks going off at midnight. And I said, it was New Year's. So our New Year's was nothing exciting, but it was a blessed 2023 for sure. What about you?
00:02:21
Speaker
Yeah, no, actually, we had a very relaxed New Year's very chill New Year's as well. We spent it with Shana actually, and just a couple, you know, our friend Shana as well, we actually did a vision boards and
00:02:39
Speaker
Um, yeah, I just had pizza now, you know, vision boards. I always actually like to do that around the beginning of the year. I like to get all of my goals out there and just try to let everything go from the previous year and just, you know, a fresh start clean slate and.
00:02:54
Speaker
really focus on, you know, what I want to achieve in the upcoming year. I do the same thing. Yeah, I'm not a big resolutions person, but I definitely, and I think the turn of the year is just as arbitrary a time as any other to do it, but it's just a nice, convenient, got some quiet time between the holidays. I like to sit down and really think through both personally, professionally, and in my family, what
00:03:15
Speaker
what I want to achieve over the next year. And it's a great time to sit down, especially with loved ones and talk about all that. My wife and I actually went on a date to do exactly that and talk about the things that we want to do as a family in 2024. I love that. I was just going to ask you how many strategies that you implement as far as that goes.
00:03:36
Speaker
Yeah, no concrete strategies. I mean, business planning is obviously very different than family planning and all that sort of stuff. But the only strategy that I find works is cutting out the time to actually talk about it. Because I think we always have the intention of, especially with significant others and partners, you want to be on the same page, but life moves quickly. And if you don't take the time out of your schedule to sit down and actually find out if you're on the same page, you can find out you're miles apart. So we try to take the time to actually do that and end a year actually finding a really, really good time.
00:04:06
Speaker
That's so important. Communication is key. Absolutely.
Corey's Journey into Finance
00:04:10
Speaker
So I really am curious about your journey into finance in the first place. You know, was that something that you had always had a plan to go into or, you know, was that, you know, is this industry something you sort of just fell into on your own?
00:04:22
Speaker
Yeah, so this was an industry I sort of accidentally fell into. I, from a very young age, thought that I would actually make video games for a living. So I taught myself to program when I was 12 with the sole ambition of making video games.
00:04:40
Speaker
And in high school, I was making video games for my Game Boy and that sort of stuff and was intending to go to school for computer science, again, with the sole idea that I wanted to make games for a living.
00:04:54
Speaker
And I got to college. I initially went to the Rochester Institute of Technology and took the first set of classes and said, these aren't my people. No knock against people in computer science, but I was like, these aren't the people I want to surround myself with in my day-to-day career. And I think I quickly realized I loved programming, but I didn't like the idea of being a programmer for my whole career.
00:05:21
Speaker
And so I transferred out, I ended up going to Cornell, as you mentioned, I did finish up my degree in computer science, but it was at Cornell, I got interested in a lot more finance related things. This was 2006, 2007, a lot of my peers were going to do internships at Wall Street banks for investment banking, sales and trading. And that's really where I got introduced.
00:05:42
Speaker
And it was around that time that I started to sort of connect the pieces of my background of programming, my interest in mathematics and my budding interest in finance to unintentionally learn about this thing called, you know, systematic investing. And that's really where my interests blossomed and the career took off.
00:06:01
Speaker
So you didn't have, is there like a specific memory or that stands out that you could look back and say, this was the moment, this was it for me? Yeah, I wish I had a better story. I really do. I've been asked this, my background a couple of times. I always feel like it's not the most exciting background to tell. I will say I was very fortunate in that at a young age, my father and my mother decided that for every dollar that I saved,
00:06:30
Speaker
in the bank, they would match it, right? And here's the reality. You can make that statement to a young child, how much money can a kid really save? You know, on a minimum wage, I was making $5.25 an hour before taxes. It's not like I was saving a whole lot. But around 14 or 15, my father and
00:06:51
Speaker
said okay it's no longer how much you save it's how much you invest in the stock market and so that was sort of a pivotal moment in learning about okay you know as someone who's trying to save what is the stock market and he's trying to get us to learn these lessons as his kids about the importance of investing and so that was
00:07:09
Speaker
sort of a transformative moment and starting to get the interest very selfishly, just going, well, if I want to save a dollar and get it matched, I need to know what this thing is. But it was, is sort of hanging a carrot as a way to learn about that stuff. And again, that just started the journey. There was no real key pivotal moment that I read some article or it was the 2008 crisis or something like that. It just sort of
00:07:31
Speaker
was something that slowly developed over time as I realized this career that I thought I was going to have starting from, you know, as young as I could remember, loving video games and loving programming, suddenly realizing this wasn't going to work and I had to find something else. Yeah, you mentioned that you have a newborn. And what is your congratulations, first of all? Do you have any other kids? No, no, this is our first.
00:07:56
Speaker
Oh, congratulations. Thank you. Yeah, it's definitely a life changer. My wife and I waited probably a lot longer than maybe we should have feeling a little old for the first and starting a family, but it's a fantastic life change. Oh, well, I was gonna I was wondering, you know, do you have any specific, you know, things that you want to implement early on in your children's life, as far as financial education goes, it's, you know, it starts
00:08:26
Speaker
It starts young I know my, my journey is very different and a long road into the finance industry and joined much later in life so I'm always curious you know how people get their start and the path that they're on and how that seed is first planted. Yeah, you know it's funny I, I certainly.
00:08:46
Speaker
the way I think about as my sister, my brother and I all received the same, in theory, upbringing from our parents, it's never identical, but could not have more different careers. So I don't think there's anything I can do to necessarily influence the career they go into, nor would I necessarily want them to follow in my footsteps into finance. But I do think there are lessons about money and investing and saving and planning for the future that I hope to pass down. And I like some of the things that
00:09:12
Speaker
You know, my parents did, I look at a couple of things. Um, I mentioned two already that were really impactful on me. So that every dollar you save, they would match. And then at a certain age, every dollar you invest, they match. And then the other big one that I remember, uh, that I'm very grateful for, that I want to enact when my kids were old enough is that, uh, my parents would buy us any book we wanted as long as we would read it, any category, any topic, as long as we read the book.
00:09:39
Speaker
they would buy it for us. And again, an open-ended spend sounds like a big risk, but how many books can a kid really go through? But for me, as someone who loved programming and computer science when I was younger and had a real passion for it, those books were $75. I couldn't afford them.
00:09:59
Speaker
But my parents, it was open ended. So I was able to self educate in a lot of topics that I wasn't learning in school because of that opportunity. And so again, I'm very grateful for that. And that's the type of thing I, I hope to continue doing with my kids, because I think it's a really powerful opportunity for kids who want to take advantage of it. That's huge. I think that, you know, it's, it's crucial to teach those things, you know, young. And I actually, I know I started homeschooling when I was
00:10:26
Speaker
I finished my last two years of homeschooling in one year and graduated early. I think it's important to continue educating outside of them, especially the public school system. Unfortunately, they just don't teach the kind of things that we need, that we use as adults. So I wanna hear more about newfound research.
Founding Newfound Research
00:10:48
Speaker
I wanna hear about your journey on starting this business and why.
00:10:51
Speaker
Yeah. So I, I started it accidentally truth be told. Um, I, yeah, I, I was very fortunate that when I started to get interested in finance, I was able to do some internships. Uh, one of which was with a local asset manager in Boston, one of which was with my father's financial advisor. And there was a very, uh, transformative moment for me when I was working with my father's financial advisor, my, my job really at that point was just to sit in meetings and take notes. I was a glorified note taker.
00:11:19
Speaker
But we had asset managers who had come through and this was in 2007 and there was a small cap, I think it was a small cap value manager who came in.
00:11:31
Speaker
Before the meeting started, I was sitting there with him and just to try to get conversation going on. I asked his thoughts on the market and he managed to give me what was at the time and might still be the most bearish prognostication I had ever heard a manager give me in person. And so he tells me all about how he thinks the U S economy is headed for significant problems. And I'm sitting there again, I guess I was 2019 at the time, something like that.
00:12:02
Speaker
And I'm thinking, oh my, I have my life savings invested in the market. This sounds horrible. Uh, so he, he finishes up his spiel and I said, well, what are you going to do about it in your portfolio? And he says, well, nothing. My job is to give small cap value exposure. If small cap value isn't the appropriate risk profile for the client, that's really up to the advisor. After all, I don't even know who's invested in my fund half the time.
00:12:24
Speaker
And I said, oh, that's a very reasonable answer. So the meeting goes on afterwards. I spoke to my father's advisor, and I said, hey, this was the conversation I had. This is what he said. What do you think? And he said, well, I think that's crazy. The whole reason I hire a small cap value manager is he's supposed to be the expert in the space. If he doesn't like the way things are going, he should be the one managing the risk. And I'm like, well, what you have is two people pointing the finger at each other as to who should actually be managing the client risk.
00:12:54
Speaker
And both have very good arguments, right? One saying, I don't know who's actually invested, whether this risk profile is right or wrong for them. The other one saying, I don't know the asset class. I'm hiring an expert. And so that's at that point.
00:13:06
Speaker
I got very serious about trying to come up with systematic investment strategies that could protect my own assets. And that led me roundabout towards trend following strategies and implementing trend following strategies with ETFs. Now ETFs are everywhere nowadays, but back in 2007, it was still very much a budding space and industry.
00:13:30
Speaker
And so I was developing these models around trend following, ETFs, model portfolios that could go to cash. And I was introduced to another asset manager in Boston who really liked the research I was working on and said, I think this is a really interesting novel concept. How do you feel about licensing me this research? I'm going to try to build a product out of it, bring it to market. If I'm successful, I'll give you some basis points. If not,
00:13:59
Speaker
Oh, well, and I said, I don't even know what a basis point is. Uh, but sure, that sounds great. And so I created this company called new found research. Newfound was a Lake. I used to go visit in New Hampshire research because I was licensing research. I was planning on going to grad school at the time. I was still an undergrad.
00:14:17
Speaker
Wow. And I said, OK, well, if it turns into something, it turns into something. Otherwise, you know, I'll go to grad school and then go work at a sales and trading desk on Wall Street. And while I was in grad school, this gentleman was able to get a sub advisory gig with a large mutual fund company and ended up raising one or two billion dollars. So all of a sudden there was very serious cash flow and.
00:14:40
Speaker
Things had turned around post 2008 and suddenly there's a very large appetite for model ETF portfolios, particularly tactical solutions. And so I said, if there's ever a time to try to be entrepreneurial, this is it because I have a business that has some cashflow. Let me see if I can interest other people in my research.
00:15:01
Speaker
But I'll pose this to you because as a young early 20s man with the confidence of a young early 20s man, of course, I'm going to be wildly successful in this. But if I put it to you this way, I'm a young, fresh, out of college, out of grad school person with no real industry experience. I have a non-disclosure agreement with my largest client. I'm not even allowed to mention who they are or that they are a client. And I'm trying to go around convincing people to buy my research as an early 20 year old.
Asset Management and Return Stacking
00:15:31
Speaker
I'm sure you can imagine it was not exactly the best business model out there. And so that's a very long intro, but to sort of condense the last 10 years, eventually said this research thing isn't really working. I'm going to pivot to more traditional asset management.
00:15:48
Speaker
really focused on the alternative systematic investment space, trend following, tactical asset allocation. And for a variety of reasons, that was just a very difficult space to be in over the last decade when we can talk about that. And that's really led me to rethinking the type of solutions I want to deliver to clients and the introduction of a new suite of products over the last year called the return stack DTFs that we're really focused on today.
00:16:15
Speaker
Yes, you just took the words right out of my mouth. I actually wanted to ask, you know, I wanted to talk about, you know, the return stacking concept.
00:16:24
Speaker
because it is gaining more attention. And can you just talk about that and explain more to our listeners about return stacking and how you're using it to apply to your investment strategies? Yeah. So I'm, I'm going to answer in a roundabout manner. I apologize. Um, but just a little bit of, a little bit of background I think is important here because the problem we're trying to solve informs the solution we attacked it with. And, um,
00:16:54
Speaker
You know, this is an industry where we don't agree on a lot of things. There's no like set in stone fact. It's all a lot of opinion. One of the very few things we do tend to agree on as an industry though is all else held equal. Diversification is good. More diversification is typically better than less. That's one of the very few things we can agree on as an industry. And yet what we saw over the 2010s is that
00:17:20
Speaker
particularly when I was working with financial advisors, there was less and less diversification in their portfolios. Portfolios became more and more concentrated in stocks and bonds, which is fine. Stocks and bonds should be the backbone of probably every investment policy. But you saw advisors start to get rid of exposure to alternative asset classes and alternative investment strategies.
00:17:45
Speaker
And in trying to figure out why there was still the ex ante expectation that these things could be beneficial from a diversification perspective, from a risk management perspective. But part of the problem was that diversification for most people is a process of addition through subtraction. What do I mean? Well, if I want to add some hedge fund like exposure to my portfolio, I typically have to sell some stocks and bonds to make room to add that position.
00:18:15
Speaker
And so I'm adding to the diversifier, but I'm subtracting the things that are core to my portfolio. And so suddenly it's not just adding, it's a trade-off decision I have to make. And I'm trading something that's typically low cost and pretty transparent and pretty tax efficient for something that's typically higher costs, less transparent, less tax efficient. And in the 2010s, when stocks and bonds did so well,
00:18:41
Speaker
It makes sense. Most people said that's not a trade-off I want to make anymore. Yes, they're absolutely driving using the rearview mirror, but that's sort of what happens in this industry. And so the question we asked ourselves, one of the things we realized that could be done was
00:18:55
Speaker
Well, what if you didn't have to sell stocks and bonds to add alternatives to your portfolio? What if you could keep those core things and in effect, layer the alternatives on top. And so it turns out this is something that institutions have been doing going back to the 1980s. PIMCO really spearheaded this in what they called their stocks plus program.
00:19:18
Speaker
uh, endowments and pensions adopted it in the early 2000s under the name portable alpha. Uh, my colleague Rodrigo Gordillo at resolve asset management came up with the name return stacking. And I really love it because it really to me clarifies the concept that you're just trying to stack returns on top of each other. So, so as a very concrete example,
00:19:39
Speaker
We offer a product, it's called the return stacked US stocks and managed futures ETF. If you put a dollar into that ETF, we're going to give you a dollar of US stock exposure and a dollar of exposure to a managed future strategy.
00:19:56
Speaker
What does that mean? Well, if you have a 60-40 portfolio and you're trying to introduce managed futures, historically, you would have had to have sold some stocks and bonds to add managed futures. And now the managed futures not only have to have a positive return, but they have to outperform what you sold for them to be additive to your total portfolio. In our structure, the way it works is that you could sell some stocks and buy our ETF, and our ETF is gonna give the stocks back to you
00:20:24
Speaker
but then you're going to add the managed futures on as well. So you're not having to do addition through subtraction. You're not having to get the added diversification by selling something. You're able to introduce the added diversification and keep those core stock and bond assets.
00:20:39
Speaker
Yeah. That's, that's amazing. So the concept has really been around for a while. It just hasn't been commonly used at this point. Yeah. Yeah. It's something that has been absolutely commonly used among institutions to implement it though. It requires financial leverage.
00:20:57
Speaker
and it requires using things like futures and swap contracts and so large sophisticated institutions have been able to do this but your average financial advisor or individual investor isn't going to manage those things and so those had to be packaged up in a mutual fund or an ETF
00:21:18
Speaker
to make them more easily accessible. And they have been in the past, you've seen combinations like again, PIMCO has a series of mutual funds that they brought to market in the sort of mid 2000s called their Stocks Plus program. Wisdom Tree has some that they brought to market in the mid 2010s called their Efficient Core, again, a combination of stocks, bonds, but you haven't really seen the combination of
00:21:44
Speaker
Sort of stocks and bonds, plus an alternative asset class. And one of the things that changed recently is the sec, uh, implemented what's called the 18 F four derivatives rule, which provided a tremendous amount of clarity for product sponsors like me as to how leverage and derivatives can be used within a mutual fund or an ETF. And.
00:22:07
Speaker
adhere to regulatory guidelines. It might surprise people, but before this rule, there really wasn't a tremendous amount of concrete regulatory framework for how derivatives could be used. Now we know exactly what the SEC considers to be safe ground. And so we can bring these types of products to market knowing that the SEC has paved the way for a framework for them to fall in the regulatory good graces.
00:22:34
Speaker
That's good. Yeah. Regulations are catching are, are finally catching up. Yes, absolutely. Absolutely. Which is phenomenal. And I think you're going to see a lot more sponsors introduce products like this because of the regulatory clarity.
Exploring Alternative Investments
00:22:48
Speaker
That's great. You guys are right on the forefront of all of this.
00:22:52
Speaker
We're trying to be, it's, you know, I'm sure you are well aware the ETF space is growing and crowded and trying to find very much, you know, unique, unique untapped areas in which you can bring thoughtful product to market. Anyone can bring product to market. We're hoping to bring thoughtful product to market, you know, is no small feat.
00:23:15
Speaker
Do you have some examples of maybe some alternative investments that you commonly use or some favorites that you typically like to use? So managed futures is by far and away probably the number one example we use. So for anyone who's not familiar with what is managed futures, it's a very catch-all category. And I typically am referring specifically to trend following strategies when I talk about managed futures, but these are strategies that are gonna trade
00:23:44
Speaker
Futures contracts which are derivatives that give you access to global equities currencies commodities. Bonds, so they might trade things like the Japanese yen or oil or
00:23:59
Speaker
You know, timber, apples in China, all sorts of, you know, there's hundreds and hundreds and hundreds of these futures markets that you can tap into. And the way a simple trend following strategy would work is it would look at the recent price. And if the recent price is going up, it would say statistically there's a likelihood that the price will keep going up. I want to buy.
00:24:18
Speaker
Conversely, if the price is going down statistically, there's a likelihood it'll keep going down. I want to sell short so I can profit from the price going down. And so you have this, um, strategy that trades all these contracts, again, a diversified set of different asset classes, both long and short, trying to profit from, um, all sorts of market movements, right? So in.
00:24:44
Speaker
2022 for example man's future strategies were very long the US dollar relative to other currencies and short bonds and posted a really tremendous profit beginning of 2022 long a lot of the commodities that were
00:24:58
Speaker
I don't want to say the beneficiaries, that's a sort of a bad, unsensitive word, but the beneficiaries of the Ukraine war with Russia. So again, it's a strategy that has the ability to navigate a lot of macro market environments because it's so dynamic.
00:25:14
Speaker
What you see when you look at this strategy historically is that it's had very low average correlations to stocks, very low average correlations to bonds. Now the correlations are time varying. Sometimes they're positive correlation, sometimes they're negative correlation, but on average it's zero. It's historically delivered positive returns.
00:25:34
Speaker
It has historically delivered positive returns during equity bear markets, and it's historically done well during inflationary routes. And so when I look at saying most people are starting with a portfolio of stocks and bonds, what can I add that I think is going to be additive, not only in terms of return, but additive in terms of helping
00:25:58
Speaker
Plug the risk gaps that exists in a stock bond portfolio. I think managed futures is a great starting point as an alternative investment strategy that can be introduced. That's fantastic. Well, what challenges would you say that you typically when it comes to advocating for
00:26:17
Speaker
you know, the strategies that you use with return stacking and alternative investments, what would you say are the biggest, you know, challenges you find yourself encountering when advocating for these?
00:26:31
Speaker
Yeah, so I think the number one challenge is the perception that leverage is risky. Leverage is sort of this unwelcome word. A lot of people have a negative connotation when it comes to leverage. Many compliance departments have outright banned leveraged ETFs or ETNs. When I think the reality is leverage is just a tool. Now, I think people's perception of leverage being dangerous comes from the fact that if you look at
00:27:00
Speaker
Just about every major financial catastrophe that has ever happened, leverage was at the scene of the crime. But leverage is rarely at the scene of the crime alone. Leverage is usually there with its buddies' concentration risk or illiquidity that are really the fire starters. Leverage just happens to add fuel to the flame.
00:27:29
Speaker
And so when you use leverage, in my opinion, to not add more of the same thing, right? I'm not saying, hey, take your 60 40 portfolio and add some leverage, add more stocks, right? Double down on that stock risk. But when you use leverage as a way to introduce additional diversifying return streams, I think that's a very powerful tool. So getting people to sort of first
00:27:55
Speaker
disassociate the idea that leverage is necessarily dangerous. In fact, leverage can be used potentially to make a portfolio safer in some situations.
Corey's Podcast: Flirting with Models
00:28:04
Speaker
One of the things I would ask is, what's riskier? A portfolio of 100% stocks or a portfolio of stocks, bonds, and managed futures that's been levered up 50%. I would argue the concentrated stock portfolio is riskier
00:28:21
Speaker
But some people just again, don't like leverage. And then once you hopefully get people over the hurdle that leverage in and of itself isn't dangerous. It's how you use leverage that can make it dangerous. Then there's a lot of important wrinkles and nuances like what's the cost of leverage? What's sort of where are the risks? You know, how can this blow up on me? All that sort of stuff that I think anyone who's doing due diligence really has to think about because this is a new framework for people for building portfolios.
00:28:49
Speaker
And it's a way that they haven't had access to really in the past. And so they haven't had to think about. And so for advisors who are starting to adopt this, there is a big education curve for them to feel comfortable before they do it on behalf of their clients.
00:29:05
Speaker
And you talk a lot about all of these strategies on your own podcast. Is that correct? Learning with models? Well, I, you know, it's, I talk a lot about these types of strategies. I am largely prohibited from talking about what I do for compliance and regulatory reasons. It's hard for me to talk about my own stuff, but I, I'm very fortunate to have a whole lot of guests that come on in and talk about systematic investment strategies.
00:29:31
Speaker
some of the foremost experts in the world, which is great, and get to educate me and hopefully educate my listening audience as to how these things work.
00:29:41
Speaker
The name is brilliant, I have to say. Thank you. I have a, I have a funny story. I appreciate that you enjoy it. So I, the name originally was a, I think a blog that I wrote a long time ago, right? And I just, a dumb young boy writing, writing about math. And I thought the name flirting with models was funny. And so I have this podcast and I launch it and generally people are appreciative and they get the humor that, you know, again, it's, it's a little funny.
00:30:06
Speaker
but I had someone come on and their marketing team was for a very large institution.
00:30:12
Speaker
And they were super excited and the person did a phenomenal job and they're talking about how they're going to, you know, clip the app thing and put it in all these different marketing channels. And then all of a sudden the episode goes live and I get an email from them saying, uh, we will not be promoting this at all. Legal has, you know, doesn't want us going anywhere near the name flirting with models. You know, we think it's inappropriate and I'm
00:30:37
Speaker
I was like, first of all, like, anything you think is inappropriate about it, you're putting on it. Like, a hundred percent. I'm not, you know, even if you assume like, if you get the double entendre, I'm not saying what type of models I'm flirting with or like, that's up to you. And if it's on, you think it's so wildly inappropriate, like.
00:30:55
Speaker
You know, get with the 21st century here. I mean, come on, seriously. Not everyone appreciates it, I guess. I love it. It's the first thing I said when I started, you know, looking at all of your stuff and digging in. The first thing I said to Shane, I was like, what a great name for a podcast for, you know, excellent. So how long have you been running that one? How long has that been out? I think six or seven years now.
00:31:23
Speaker
Oh, pro. You're a veteran at this. Well, well, yes and no. It's definitely, I started it seasonally. So my first season was just six episodes. And I think it was Michael Batnick and Patrick O'Shaughnessy, who both said something very similar to me early on that said, I used to write a lot. I used to write a weekly research note. And both of them mentioned to me
00:31:51
Speaker
You're you're only communicating with people who like to read and there's a whole different group of people who like to learn by listening and you'll connect to your audience in a very different way Through a podcast. We really think you should try it. And so I said, all right, I'm gonna I'm gonna give it a go and I don't know how you felt starting this I just felt like it was completely out of my comfort zone and I
00:32:16
Speaker
trying to edit and get it all working. It was just such a time suck. And I was such a perfectionist about it that after six episodes or seven episodes of my first season, I was like, I am done.
Podcast Production and Challenges
00:32:27
Speaker
Feedback was good, but I was like, I am done. And then I was in Canada at a conference and this woman came up and tapped me on the shoulder and she said, are you Corey Hofstein? And I said, yes. She said, I could tell by your voice. I love your podcast.
00:32:43
Speaker
That's fantastic. And I said, shit, now I got to keep doing this podcast. And so I did. But the trade off I make, and we'll see, I'm contemplating changing the format this year. As I said, I can't do this year round. It's just, as you know, it's a lot of effort getting guests and doing background and doing the episode and editing and then putting it out and marketing it. It's just a lot of work.
00:33:11
Speaker
And it's not my day job, right? That's not really what I should be spending. Yeah, it's not what I should be spending my time on or a huge proportion of my time on it. So I do it seasonally where I start the work in the spring, I release it in the summer and then I typically take six months off for the year of not doing it. Yeah. And that has definitely shot me in the foot in terms of
00:33:34
Speaker
audience traction, right? You sort of create this habit and then you tell everyone, okay, you know, we're done. I'll see in six months. And I think the reality is for it to grow as much as it could, it just needs to be more
AI's Impact on Finance
00:33:45
Speaker
continuous. And so I'm flirting with the idea this year of just being a little bit more, instead of doing
00:33:52
Speaker
you know, every week, for three or four months, just doing maybe one a month and just keeping it consistent that way. That's how we do it. Yeah, mine's fun. So it's hard. It's hard to pull up. It's so hard. But how far in advance are you looking at your guests right now? Because you guys reached out to me a while ago. Yeah, yeah, pretty good at booking.
00:34:14
Speaker
Yeah, we try to create the plan a month to two months in advance. Yeah, that's good. But I'm actually, when I was digging into a little more research on YouTube, I saw a conversation you had on X formerly known as Twitter. You were talking about AI. I'm really curious to know, especially with your tech background, what are your thoughts about AI and how is that going to change
00:34:44
Speaker
I mean, it's obviously it's disrupting everything. But how do you foresee that influencing our industry? So I just had a guest on my podcast, a gentleman named Bin Ren from a company called SigTech. And he had started his company initially as providing very sophisticated back-testing software to institutional quants.
00:35:14
Speaker
And when he saw the recent changes in chat GPT, he said, this is a complete transformation of the way research will be done. And I am completely changing how my business works.
00:35:30
Speaker
What he had originally, I'm telling this as sort of an example, but I think it's an illustrative example. What he had originally was a piece of software, right? That programmers like me could tap into the different endpoints, the API, and it was like a software library that you could use and coders could use. What he saw with chat GPT was the ability to say, let chat GPT be the interface, expose all the software to chat GPT,
00:35:59
Speaker
and then allow anyone to access an incredibly complex quantitative database through English, right? So you could sit there and say, what was the performance of a strategy that goes along the Magnificent Seven and short the NASDAQ?
00:36:21
Speaker
And behind the scenes chat GPT would figure out through the context, everything you meant, what is the magnificent seven? Which stocks are those? Well, how should it wait them? You didn't tell it how to wait them. So it's going to make some interpretation. It's going to figure out what API calls it needs to figure out what are these stocks? How do I build a portfolio? What's the performance of that portfolio? How do I short the NASDAQ? What's the performance of that trade? And that's all happening completely hidden behind the scenes, right? And I think the way bin put it,
00:36:50
Speaker
Uh, to me, I thought was really insightful, which was you can look at chat GPT and other sort of similar, uh, AI systems right now is basically having the equivalent intelligence of a first or second year analyst. They're not, you know, when you, when you are beyond that level, you recognize where chat GPT is wrong.
00:37:15
Speaker
So you can't ask it for more than that, but if you think of saying we can now replace every first or second year analysts in the world, pretty much on any topic with AI, what is that free up from a productivity perspective? Right. In an incredible amount.
00:37:34
Speaker
And so I just, I think for me, the answer, I don't have a good answer. I think with any technology, these are things that are highly adaptive and in flux and people are so creative with this stuff. I just, I don't have any particularly unique insights as to where this is going to go other than I think I'm incredibly excited about the opportunity of saying at your fingertips, you have a first year analyst in every potential topic in the world, pretty much.
00:38:01
Speaker
And there's the opportunity going forward to interact with very sophisticated systems via an English conversation, which suddenly, I think, opens up a huge amount of sophisticated analysis to be done more rapidly and to be done by people who maybe aren't coders. So for example, if you're not a coder and you couldn't have accessed their system historically,
00:38:29
Speaker
Well, I'm sure you can sit there and think of a bunch of strategies that you could explain in English that you would want to explore the concept of. You're now going to be able to do that because chat GPT is the technology that can take your English understand context and reframe it into these technological API calls. And I just, I think that's an incredibly powerful interface.
00:38:51
Speaker
Yeah, there's a lot of fear surrounding AI, but then, I mean, of course, a lot of excitement. I mean, they said the same thing with what the computer that it was gonna take away from these jobs and, you know, but it actually opened up a tremendous amount of jobs, so. I'm hopeful, I'm hopeful that I look at something like chat GPT and I say, yeah, maybe it might take away some jobs, but I always think of these deflationary technology pressures as hopefully,
00:39:20
Speaker
opening up room for more creativity, right? Faster processor speed. All right, so we have all these computers that can do the work of thousands of humans sort of in parallel instantaneously. Okay, great. Now all those humans are freed up to do other really thoughtful, creative work. And to me, that's, I try to be optimistic about what we're going to be able to achieve as we continue to push boundaries here.
00:39:48
Speaker
As far as, you know, alternative investments in general, uh, how do you see things evolving over time with that? Yeah. As it relates to AI or as it just relates to the alternatives in general. Yeah. So I've changed my view over time here. Um, one of the things that I've come to appreciate more in my career is the importance of structure.
00:40:17
Speaker
So what I mean by that is when we look at an investment strategy, there's the strategy itself. What, how does it actually, you know, make buy and sell decisions? What does it trade? And then there's the wrapper in which you can access the strategy. Is it implemented as a separate account? Is it implemented in a pooled hedge fund? Is it put into a mutual fund? Is it put into an ETF? And often that decision is overlooked and I've come to appreciate as my career has gone on,
00:40:45
Speaker
That's actually a hugely important consideration because there's different. The different structures. Can support different types of strategies and so I've sort of come to the view that as far as all truly alternative strategies go.
00:41:05
Speaker
mutual funds and ETFs can only support a certain subset of those truly alternative categories ETFs I think less than mutual funds and then mutual funds substantially less than hedge funds and a lot of that has to do with things like liquidity constraints and what you can and cannot invest in has to do with leverage constraints and it has to do with flexibility
00:41:29
Speaker
you know, your mutual fund and your ETF are often going to have a very defined prospectus. Hedge funds can be much more flexible. And so I think as it relates to sort of scouring the earth for alternative investment strategies, what I am excited about is a question of how can we
00:41:50
Speaker
think about bringing investment strategies that are maybe need to be put in hedge fund wrappers for them to be successfully delivered and getting that in the hands of, you know, not necessarily people who are just simply high net worth individuals. So is there a way to bridge the gap between what's happening
00:42:11
Speaker
in a hedge fund and bring it to market in a regulated vehicle like a mutual fund. And I don't think we're there yet by any means, but things like interval funds growing in popularity, I think start to bridge that gap a little bit, at least for less liquid investments. And so I'm excited about some of the structure innovations there. I think tokenization is another really interesting one where you could potentially see the ability for tokens to effectively trade as ownership in less liquid
00:42:41
Speaker
assets or investment strategies, providing secondary market liquidity without impacting the underlying. I think there's really interesting ideas there. And I'm excited about from the alternative markets perspective, again, this, this concept of how structure can, can shift in adapting growth to bring some of these more sophisticated concepts or investment strategies downstream. Fantastic.
00:43:07
Speaker
Well, I'm excited about the future and see how it all evolves. And then AI, I mean that, that in general, we have no idea how that's going to affect the industry, but I've enjoyed talking to you very much, Corey. Thank you for coming on today. Is there anything you want to add? I mean, where are your favorite? What are your favorite resources to, um,
00:43:30
Speaker
know, for education on alternative investments specifically, but are some of your favorite. So you mentioned x.com. I will always call it Twitter probably. It's so weird. Yeah, it's it's tough to call it extra. And you're not tweeting anymore. You're Xing or whatever it is. What are you doing?
00:43:51
Speaker
I, you know, Twitter X, whatever you want to call it, there is a vibrant community of financial professionals who many of whom are operating under anonymous pseudonyms that when you actually learn who they are, it is, there are some incredibly impressive people, uh, in all in traditional finance, but as well as, you know, alternative finance, high frequency trading, uh, weird asset classes and.
00:44:19
Speaker
They are willing to engage in conversation in a way that I think is sort of an unparalleled historically in your access to people.
Closing Thoughts and Networking
00:44:27
Speaker
So I think being part of the conversation on Twitter has been huge, both for me from a learning perspective, me from a networking perspective, and I would certainly encourage anyone who's
00:44:38
Speaker
interested to start to follow along and engage in the conversation of the debate because there's a ton of really fascinating stuff happening there. And then there's any account you recommend. Say that again. Any accounts you recommend.
00:44:52
Speaker
Well, me, of course. Obviously. Obviously. There are, it really depends on what you're up for. I'm going to go follow all. I follow you, of course, but follow these things. Yeah. You know, there's a ton of people trying to think of
00:45:11
Speaker
It's so funny. I know, I know so many, like, I don't know handles, you know? But, you know, you've got like, I'll give an example, like someone like Cliff Asness, right? Founder of AQR is on Twitter answering questions from completely anonymous, unknown people who might have 10 followers, right? It's a very like leveling playing field because when you're engaging with someone, you're not necessarily, you don't know who they are.
00:45:33
Speaker
And so you get people like cliff that you can get access to. But what I also appreciate is that there's a huge number of very sophisticated non-professionals on there as well. People whose primary career isn't finance, but are incredibly passionate do-it-yourselfers. I don't have a great list, but if you do follow me, if you find me, there are lists and I've created lists of
00:45:56
Speaker
people in crypto, people who are volatility traders, people who trade fixed income. And if you look at my lists, you will see dozens and dozens of people in each asset class and category that are the people I follow. And so, you know, I can't give a higher recommendation than that. Perfect. Well, we will keep a lookout. Thank you so much, Corey. Thank you so much for taking the time today out of your busy schedule to join us, you know, as our first guest of the first season for this year. So
00:46:24
Speaker
I'm very, very excited about the future and just thank you so much again for taking the time to chat with us. Thank you everyone listening. Happy, happy new year. Be sure to follow Boundary and Capital on all of our social networks as well. And we will see you next time. Thank you so much. Thank you.
00:46:44
Speaker
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or any specific security. It is only intended to provide education about the financial industry. To determine which investment may be appropriate for you consult your financial advisor prior to investing.
00:47:04
Speaker
Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember, investing involves risk and possible loss of capital. Please seek advice from a licensed professional.