Speaker 1: Welcome to Trillans. I'm Joel Webber and I'm Eric bel Tunis. Eric,
Speaker 1: the sixty portfolio is really the bedrock of investing has
Speaker 1: taken a ton of arrows, but we're gonna spend some
Speaker 1: time today talking about maybe how can be even better. Yeah,
Speaker 1: there's a couple of smart guys who I largely met
Speaker 1: on Twitter, but they have ETFs invest in ETFs have
Speaker 1: mutual funds there in the asset management world. But they
Speaker 1: have really done something that I think we'll find an audience,
Speaker 1: which is everybody loves sixty. I mean it's a smash hit.
Speaker 1: Look at any Advisor PORTFOLI it's usually some derivative of sixty.
Speaker 1: And yet everybody is worried about the sixty and the
Speaker 1: forty both falling at the same time, right because they
Speaker 1: both went up for the same time. So how do
Speaker 1: you hedge against that and yet keep your sixty forty
Speaker 1: because no one wants to let go of that because
Speaker 1: every time people try to hedge, they've been they would
Speaker 1: lose money because the market rebounds almost every single time.
Speaker 1: Yet there could be a time when it doesn't. So
Speaker 1: how do you like have your cake and need it too?
Speaker 1: And these these two guys have have seemingly come with
Speaker 1: a way to do this that involves a model portfolio,
Speaker 1: which is a whole another trend. Model portfolios are very popular.
Speaker 1: UM that invests in ETFs and mutual funds, that tries
Speaker 1: to allow advisors to have it all. And um, it's
Speaker 1: really fascinates called return stacking and I'm excited to dive
Speaker 1: into it. So joining us on this episode Corey Hofstein,
Speaker 1: Newfound Research Chief investment Officer and Rodrigo Gordio, Resolve President
Speaker 1: and portfolio manager. You can read more about their research
Speaker 1: at return stacking dot com or follow along at return
Speaker 1: Stacking dot Live, this time on Trilliance return Stacking Corey Rodrigo,
Speaker 1: Welcome to Trillions. Thank you so much for having us
Speaker 1: excited to be here, thanks to Okay, Corey, I want
Speaker 1: to start with you. How did you guys find each other?
Speaker 1: Because you guys don't even like officially worked together, right,
Speaker 1: Like this kind of unusual to have two different firms
Speaker 1: that collaborate like this. Yeah, this is definitely a little
Speaker 1: weird to have two in theory competing asset managers work
Speaker 1: on research and launch product together. But this was really
Speaker 1: born out of a mutual respect. For years and years
Speaker 1: and years, Rodrigo and his team have been publishing research
Speaker 1: that I've read and really enjoyed, and I hope they
Speaker 1: would say the same about my team and the research
Speaker 1: that we've written. We ended up getting introduced to one
Speaker 1: another through that mutual respect for research, and then ultimately
Speaker 1: found that we had a large number of clients in common,
Speaker 1: or clients who would learn about one of us and
Speaker 1: ask about the other, and ultimately found that a lot
Speaker 1: of the approaches we were taking in from a philosop
Speaker 1: topical perspective, we're very much aligned, but from an actual
Speaker 1: product perspective, we're very complementary. And so it really made
Speaker 1: natural sense for us to work together on a lot
Speaker 1: of things. And Rodrigo, what, what was the thing that
Speaker 1: they did that you were like, Oh, man, that's really good.
Speaker 1: I wish I had thought of that. Oh my god,
Speaker 1: I mean it's you know what, Like like Corey said,
Speaker 1: we constantly found ourselves talking about similar topics, and as
Speaker 1: you know, when you're talking about complex issues, you try
Speaker 1: to create a language around them when the average investor
Speaker 1: can understand. I've always been envious of you know, we'll
Speaker 1: go out and we'll talk about ensemble methods for quantitative investing,
Speaker 1: and then Corey would say timing luck is a thing.
Speaker 1: So it's just a much much better language. Often like
Speaker 1: you're looking at them like that's this, We're talking about
Speaker 1: the same thing. But his language was just so much
Speaker 1: more beautiful and accessible than we often often struggle with
Speaker 1: that a resolved So that's I think that's what I've
Speaker 1: always been envous a. Corey is a fantastic writer and communicator. Okay,
Speaker 1: so what's the product that you guys have come to
Speaker 1: market with? Calling it a product, it's interesting what we
Speaker 1: what we came up with, uh, and we started noodling
Speaker 1: this over the summer of was the concept of these
Speaker 1: new funds that had come out in the market, including
Speaker 1: our funds. So Corey has gone through a bit of
Speaker 1: evolution and in the product lined up. Even though he's
Speaker 1: been talking about capital efficiency for years and using capital
Speaker 1: efficiency for years in many respects, the product that he
Speaker 1: launched or relaunched in November was able to create give
Speaker 1: you some unique alpha's and unique bade us stacked on
Speaker 1: top of each other using capital efficiency. We had been
Speaker 1: doing that for ten years in our fun but it
Speaker 1: was tough for us to communicate that to the audience.
Speaker 1: And then we started seeing et F providers like wisdom
Speaker 1: Tree and Standpoint and not Standpoint Simplify also come up
Speaker 1: with stacking ideas, and well like, how do we how
Speaker 1: do we use these new products that have never existed
Speaker 1: before in the retail space, how do we put them
Speaker 1: together in such a way that we can get people
Speaker 1: to do better to create much more robust portfolios. And
Speaker 1: so we started thinking about it, and we we came
Speaker 1: up with again language right this idea. Instead of calling
Speaker 1: it capital efficient or leverage or or structural alpha, we
Speaker 1: named it return stacking, and we did it in such
Speaker 1: a way that was the most accessible to the average investor,
Speaker 1: even foundations and small corporations. And so in the summer
Speaker 1: we started noodling this and we decided to write a
Speaker 1: paper about the idea of stacking returns how to improve
Speaker 1: a sixty forty portfolio through these new products and putting
Speaker 1: them together in unique ways. And that led to then
Speaker 1: a demand for some sort of solution, which led to
Speaker 1: this index that has a bout of bts and mutual
Speaker 1: funds that we've structured together to create uh profile that
Speaker 1: we're gonna I'm sure to talk about the rest of
Speaker 1: this podcast. Let me jump in here, um and really
Speaker 1: get down to this stacking issue. And I want to
Speaker 1: go back a couple of years with you, Cory. There's
Speaker 1: a product that was launched called nt SX, which is
Speaker 1: the wisdom Tree US Efficient Core e t F. It
Speaker 1: used to be called the nine sixty and that was
Speaker 1: born out of a Twitter conversation with you and a
Speaker 1: couple other people. And this was interesting to me at
Speaker 1: the time because, um, I was on Twitter and I
Speaker 1: thought it was interesting. It was one of the first
Speaker 1: e t s that was born out of people just
Speaker 1: talking about something wisdom Tree launched that. I was skeptical.
Speaker 1: I thought advisors just don't want to They typically don't
Speaker 1: like to have all the asset classes together. They want
Speaker 1: to pick the pieces. But it's got a billion dollars
Speaker 1: and it's a success and they've launched. I think other
Speaker 1: versions of it explain to me the sixt what and
Speaker 1: I think this is essentially what return stacking is, and
Speaker 1: this is one of the e t s you use
Speaker 1: in your model. So I guess walk us through how
Speaker 1: this fun gets the exposure and how it gets the
Speaker 1: extra how it stacks, and I think that will be
Speaker 1: a metaphor for the bigger model, right absolutely so. As
Speaker 1: you mentioned this e t F that was launched by
Speaker 1: Wisdom Tree, Jeremy Schwartz at wisdom Tree was really the
Speaker 1: driver behind. That was born out of a conversation that
Speaker 1: was taking place on Twitter between me and to actually
Speaker 1: anonymous Twitter accounts non related sense who has unfortunately since
Speaker 1: passed away, and another Twitter user named Jake and Jeremy
Speaker 1: Sawton thought it was a really unique innovative idea and
Speaker 1: was able to breathe life into it. The core concept
Speaker 1: is to take a sixty forty portfolio and lever it
Speaker 1: up one point five times, and that's going to give
Speaker 1: you a N sixty. Now how is that done in practice? Well,
Speaker 1: what happens is for every dollar you invest in the fund,
Speaker 1: the fund is gonna take ninety cents and invest it
Speaker 1: in the SMP five and it's gonna leave ten sense
Speaker 1: aside in cash or cash equivalence very short term US
Speaker 1: treasuries for example, as collateral to then buy a ladder
Speaker 1: of US Treasury futures, It's going to be a blend
Speaker 1: of two year, five year, ten year, and twenty plus
Speaker 1: year US Treasury futures percent in each and that will
Speaker 1: give you sixt notional exposure. So you got ninety in
Speaker 1: the SMP plus sixty using treasury futures. Now we could
Speaker 1: stop there and say, well, that is stacking. What we've
Speaker 1: done is we've stacked treasury returns on top of equity returns,
Speaker 1: which may or may not be a just a very
Speaker 1: interesting solution as an alternative to someone who's very equity heavy.
Speaker 1: Clifford ass At, a q R. Wrote a paper twenty
Speaker 1: five thirty years ago called why not just equities? And
Speaker 1: he showed actually, a levered sixty forty over the long
Speaker 1: run does much better than just equities. Jeremy Schwartz recently
Speaker 1: published an update to that for plus years about a sample.
Speaker 1: But I think where this gets really interesting is to say,
Speaker 1: let's actually not use it as an alternative to equities.
Speaker 1: Let's use it as an alternative to a sixty forty.
Speaker 1: And by that I mean if I just invest sixty
Speaker 1: six percent of my capital in this levered sixty forty,
Speaker 1: then I get equivalent exposure to what investing a hundred
Speaker 1: percent of my capital in a sixty forty would have
Speaker 1: given me. But I'm left with thirty three of my
Speaker 1: capital left over that I can do whatever I want with.
Speaker 1: And then it becomes a very interesting question of what
Speaker 1: do you do with that leftover capital, which then in
Speaker 1: effect is going to be a return stacked on top
Speaker 1: of that six return profile. So we're able to retain
Speaker 1: the sixty forty that everyone wants and loves, but use
Speaker 1: a bunch of leftover capital to potentially stack something diversifying
Speaker 1: in return generating on top. So this fund is and
Speaker 1: we're gonna get to the bigger model first, but this fund,
Speaker 1: essentially UH is up about seventy since launching. Would you
Speaker 1: would you say it? Would you compare this to a
Speaker 1: balance like a balanced fund or the SMP. What's the
Speaker 1: right benchmark here? Well, my guess is it's probably benchmark
Speaker 1: to the SMP. I would argue that's not a great benchmark.
Speaker 1: The reason I love the phrase return stacking, which I
Speaker 1: have to give all credit to Rodrigo for coming up with,
Speaker 1: though I do plan over time to whitewash history and
Speaker 1: take that from him. Actually on the term, I wrote
Speaker 1: this book back in the day called The Institutional E
Speaker 1: T F Toolbox, which is available on Amazon in case
Speaker 1: you're curious anyway, I interviewed some institutions and I think
Speaker 1: they refer to this as portable alpha. So are you
Speaker 1: sort of rebranding it or is there a difference between
Speaker 1: portable alpha and return stack. There's a slight difference. Uh.
Speaker 1: Portable alpha really from an institutional perspective. Back in the
Speaker 1: two tho era was all about stacking alpha on top
Speaker 1: of your exposure. So if you look at something like
Speaker 1: an nts X, which is just SMP beta plus bond beta,
Speaker 1: well that's not really portable alpha. I might call that
Speaker 1: portable beta. Right You're you're porting beta on top of beta.
Speaker 1: There's no alpha there. The return stacking concept is more
Speaker 1: generic than portable alpha because it's a question of what
Speaker 1: do you do with the extra capital you free up?
Speaker 1: That capital efficiency you create and you could go out
Speaker 1: and buy alpha strategies, which then it does, I think,
Speaker 1: become very similar to portable alpha. But a lot of
Speaker 1: the nuance comes into how are you actually generating that
Speaker 1: capital efficiency, how much does it cost you, where is
Speaker 1: it coming from? And that's sort of a difference in
Speaker 1: terms of how portable alpha used to work versus what
Speaker 1: we're doing here. Everything that clos has talked about has
Speaker 1: allowed an investor to increase portfolio real estate. Right. An
Speaker 1: institutional investor has a vast, a wide expanse of real
Speaker 1: estate that they could create. They get a hundred dollars,
Speaker 1: they could invest a thousand dollars if they want to,
Speaker 1: through derivatives, through borrowing and the like. Retail investors, retail advisors,
Speaker 1: a lot of small pensions and institutions are stuck with
Speaker 1: a hundred cents on the dollar. You give them a
Speaker 1: hundred dollars, they only have that to spend, and that's
Speaker 1: because they don't necessarily have access to leverage, have access
Speaker 1: to derivatives, has the expertise to do it, don't want
Speaker 1: to do it all of a sudden. In the last
Speaker 1: two years, with products like ours in nts X, you
Speaker 1: now are able to buy instead you want sixty forty,
Speaker 1: you only have to spend sixty seven dollars of your
Speaker 1: hundred to get sixty forty returns for the year, And
Speaker 1: now you've created thirty three dollars of portfolio real estate. Right.
Speaker 1: And what the reason we started with return stacking the
Speaker 1: language stack returns is that if you do it right,
Speaker 1: if you choose the right thing to put onto your
Speaker 1: thirty three percent you're getting, you're gonna get that six return,
Speaker 1: and whatever you make in that extra thirty three dollars,
Speaker 1: that return is going to stack on top the six forty.
Speaker 1: So this the paper is is about, you know, how
Speaker 1: to stack returns in a low return environment, because I
Speaker 1: think that's what everybody's worried about sixty forty, like Eric said,
Speaker 1: where they're terrified of getting away. You know, they know
Speaker 1: that it might be low returns in the future of
Speaker 1: sixty forty. They know there might be higher correlations, but
Speaker 1: they're terrified and moving away from it. This this allows
Speaker 1: investors to both have their cake and eat it two
Speaker 1: through stacking something thoughtful on top. Right. Okay, so I
Speaker 1: want to talk about the thirty three dollars a little
Speaker 1: bit more, but before we do that, let's just talk
Speaker 1: about the the bigger model, because you're you're adding a
Speaker 1: few other things into that, right, correct? Yeah, So what
Speaker 1: are those and how do how does it all work? Yeah?
Speaker 1: So the idea. First, the paper goes through a simple
Speaker 1: example like we just discussed, right, But then we say
Speaker 1: a lot, very few investors will actually buy a single
Speaker 1: et F and then have that be their portfolio and
Speaker 1: then stack you know, whatever they want to do on that.
Speaker 1: But it's time out real quick, and let's just hone
Speaker 1: in on that. This is crucial because a lot of
Speaker 1: people ask me, why isn't there just one e TF
Speaker 1: for everything? Or you know and or why don't ask
Speaker 1: the dellocation which holds like balanced ETF are weren't they
Speaker 1: more popular? And advisors just are the word us, the
Speaker 1: word terrified. They're terrified of having one line item that
Speaker 1: they want to have more in there. And so I
Speaker 1: guess just just I just want to stop there for
Speaker 1: one second and also address that because Joel, you had
Speaker 1: that idea for why isn't there a hole inch alata ETF.
Speaker 1: Ironically it probably wouldn't sell that much because advisors want
Speaker 1: to be the deciders. They want the pieces in there.
Speaker 1: So I'll pass it back to Rodrigo, who obviously is
Speaker 1: making the pieces. Well, this is this is from years
Speaker 1: of interacting with advisors, right There's it's really a tough
Speaker 1: to get through your compliance that you're gonna put sixties
Speaker 1: six cents on the dollar in a single service provider.
Speaker 1: It's just not a thing. And then from a optics
Speaker 1: respective with clients. Let's say you have a single company
Speaker 1: that has five beautiful et s. It's very rare to
Speaker 1: find the advisor that's okay with giving it all to
Speaker 1: a single provider. And so you you certainly want to
Speaker 1: have manager diversity. You want to have you want to
Speaker 1: minimize the risk there from one single manager blown up
Speaker 1: or not doing well. But if you're looking at return stacking,
Speaker 1: then you only had one product to play with, it
Speaker 1: would be a problem. What we found, which was very refreshing,
Speaker 1: is that as you start digging in, you find that
Speaker 1: there were, at the time of writing the paper, we
Speaker 1: found ten very clear return stacked funds, and they were
Speaker 1: stacking different things. Some were stacking equity beta on top
Speaker 1: of bond beta. Some were stacking s p y and
Speaker 1: then you know, fifty cents of spy and a hundred
Speaker 1: cents of trend manu futures trend, another one with sacking
Speaker 1: global equities with managed futures trend. We were stacking global risparity,
Speaker 1: and then on top of that global macro like rules base,
Speaker 1: Global macro cory was active equity on top of active
Speaker 1: bonds and tail protection wrapped around that. So all of
Speaker 1: a sudden you start finding these really exciting products that
Speaker 1: you can now put together in a way that makes
Speaker 1: that creates an exposure of six equities bonds, and then
Speaker 1: what we stacked on top was thirty cents of systematic
Speaker 1: um trends that's just like managed future trends or ct
Speaker 1: A s, and then another thirty percent of global macro
Speaker 1: or systematic global macro. And the difference between CTA and
Speaker 1: global macro they're both futures based. One does pure trend
Speaker 1: the other one uses value factor, the momentum fact, the
Speaker 1: momentum trend factor, the carry factor, some use seasonality, some
Speaker 1: use me in reversion, right, so it's just a bit
Speaker 1: more diversive. We jump in here. So, uh, what what
Speaker 1: you just went over was hedge fund strategies or alts,
Speaker 1: And they're called alts because they're alternative the stocks and
Speaker 1: bonds and they don't have they have very low correlation
Speaker 1: to that category. There are et s, net Corey, but
Speaker 1: they totally ignored because they just don't really do much
Speaker 1: compared to stocks and bonds in the last ten years.
Speaker 1: But I think there is a knowledge that they when
Speaker 1: the market does sell off, those hedge fund ish kind
Speaker 1: of strategies rise to the top. They tend to be
Speaker 1: the top performers when the both the sixty and the
Speaker 1: forty or down. I've seen it happen. It's only little
Speaker 1: windows because then the FED steps in and everything goes
Speaker 1: up again. But is that why you're using your thirty
Speaker 1: three cents on that instead of in the NTSX situation
Speaker 1: more treasuries because you're like, we already had that covered.
Speaker 1: Now let's get some alts in there just in case
Speaker 1: the world goes to hell. That will help you on
Speaker 1: the protection side. That's the idea here, just to try
Speaker 1: to simplify it. The nail on the head that at
Speaker 1: the end of the day, there are these really interesting
Speaker 1: and attractive alternative strategies from a diversification perspective. The problem
Speaker 1: is most allocators have been stuck with this either or
Speaker 1: problem over the last decade that to introduce these diversifiers
Speaker 1: they have to sell stocks or bonds. So you look
Speaker 1: at something like managed futures, which had a total return
Speaker 1: the stock gain Managed Future ct A index I think
Speaker 1: at a total return of between twenty and for the
Speaker 1: entire last decade. Right, So if you sold stocks or
Speaker 1: bonds to buy managed futures, you were very disappointed in
Speaker 1: the total return, but it is a phenomenal diversifier historically,
Speaker 1: particularly during periods of inflation fear. So if you can
Speaker 1: have your sixty forty and then stack those extra managed
Speaker 1: futures are alternative returns on top. Not only are you
Speaker 1: potentially earning the extra return, but you are whole fully
Speaker 1: making your portfolio more resilient by adding a diversifier that
Speaker 1: particularly attacks what a sixty portfolio is weak two, which
Speaker 1: is inflation risk that tends to cause stock and bond
Speaker 1: correlations UH to turn positive. Okay, I like this, although
Speaker 1: I will just question the fact that you know, plus
Speaker 1: thirty three plus all this other stuff does not equal
Speaker 1: one hundred. So there's some really basic math that I
Speaker 1: want to take you guys up one but as a joke.
Speaker 1: But I do want to just talk about this thirty
Speaker 1: three and sort of the competition there, because it sounds
Speaker 1: like there's a lot of very technical things that are
Speaker 1: happening there that a normal retail investor isn't going to understand.
Speaker 1: You're you're probably catering to an advisor more than anything there.
Speaker 1: And I'm also just you know, genuinely curious here, like
Speaker 1: how are you supposed to figure out what you're supposed
Speaker 1: to do with that thirty three? I mean there there's
Speaker 1: probably a version of that that I should put in
Speaker 1: crypto even right, Sure, look, there's it's not necessarily I mean,
Speaker 1: the index is meant to be prescriptive, but the paper
Speaker 1: is not right. So what you do with that thirty
Speaker 1: three cents? A lot of it has to do with
Speaker 1: your own values, right. For example, if you're a value manager,
Speaker 1: if you truly believe in buying cheap then all this time.
Speaker 1: You know, if you're like Warren Buffett that leaves some
Speaker 1: cash on the sidelines and waits for the opportunities, you
Speaker 1: can't do that as an advisor. Investors have a hard
Speaker 1: time staying in cash until value comes up again they
Speaker 1: can snatch things up. You know, a few people can
Speaker 1: actually accomplish that. But again, having your cake and eating
Speaker 1: it too. Now you get full exposure to sixty by
Speaker 1: only investing sixty seven cents, you have thirty three dollars.
Speaker 1: It's on the sidelines. March happens. If you're a value guy,
Speaker 1: you can you can pick up a lot of cheap stocks, right,
Speaker 1: And because you can buy you really, like you said,
Speaker 1: adding it, it's you're getting a hundred cents plus another
Speaker 1: thirty three cents, a hundred percent exposure thirty three cents.
Speaker 1: We're in cash. Now you've invested it in March twenty,
Speaker 1: you've bought all the chief stocks. You stacked a bunch
Speaker 1: of return. So that's one way of return stacking. Right.
Speaker 1: The problem is that once you're there, now you're exposed
Speaker 1: not sixty forty, but you're now exposed ninety forty. You're
Speaker 1: you're very, very heavily intequities, and that becomes a long
Speaker 1: term problem in our view, Right, So what we tend
Speaker 1: to espouse and lean on if what are you gonna
Speaker 1: do with that thirty three You want to do things
Speaker 1: that can thrive when equities and bonds don't thrive. And
Speaker 1: I think you, guys. I was just listening to a
Speaker 1: podcast of Years with Gina Martin Adams, your your boss,
Speaker 1: Eric uh and she was talking about you, guys. Talked
Speaker 1: about a bunch of very interesting things, one of which
Speaker 1: was inflation and the fact that when we've seen periods
Speaker 1: of inflation and rising rates, we've seen bonds and equities
Speaker 1: not only lose money, but lose money at the same time.
Speaker 1: The correlations went up, so what does well, what can
Speaker 1: you do for that? Other one of the things you
Speaker 1: could explore is a diverseified commodity index, right. Another thing
Speaker 1: you could explore are these c t A s and
Speaker 1: global macro funds that can both make money and inflation markets,
Speaker 1: and then when the inevitable FED comes to break the
Speaker 1: back of inflation, it can also profit from downward deflation,
Speaker 1: which they did beautifully in the two thousand's right. So
Speaker 1: that's that's kind of what some of the things that
Speaker 1: you can do with that three cents it would be.
Speaker 1: It depends on just how I guess your tolerance for risk,
Speaker 1: But it seems to me it would be kind of
Speaker 1: dangerous to put it into something like crypto, which has
Speaker 1: acts like a high beta stock. If that goes down,
Speaker 1: then you're down. Then you're all all hundred and thirty
Speaker 1: three is down. Where you want the thirty three largely
Speaker 1: to offset the potential for the six going down, I
Speaker 1: would guess. But I guess you could go all out
Speaker 1: and add on to from from my value, that would
Speaker 1: be my preference, But everybody has a different set of values, right,
Speaker 1: I think I think when someone hears this, they go well,
Speaker 1: you're just leveraged, and that's we know how that ends.
Speaker 1: But I think that's the main point is if you
Speaker 1: use your leverage to add on more of the same
Speaker 1: thing you just bought, clearly that's where it gets dangerous.
Speaker 1: But if you buy something that can offset or work
Speaker 1: against or go up when the other parts go down,
Speaker 1: that seems like a responsible way to leverage, which I
Speaker 1: could see appealing to advitor people who are probably worried
Speaker 1: about those kind of things. I mean, there's a lot
Speaker 1: of target outcome ets have become popular for the same
Speaker 1: reason they sculpt your returns, they give you some sleep
Speaker 1: at night feeling because they use options in a certain
Speaker 1: way to limit your downside. People are very quick to
Speaker 1: point out that almost every major financial catastrophe, both globally
Speaker 1: as well as every hedge fund that's blown up, has
Speaker 1: been due to leverage, which is pretty much true. But
Speaker 1: it's also been due to concentrated leverage. Right, there's a
Speaker 1: very big difference between diversified leverage and concentrated leverage. Right.
Speaker 1: If I said, let's take this sixty already in layer
Speaker 1: on top very very short term, very high quality investment
Speaker 1: grade bonds, that's very different than saying let's take this
Speaker 1: sixty forty and layer on top thirty three cents of
Speaker 1: bitcoin and ethereum. Right, those return profiles are going to
Speaker 1: be very different, and the risk you're taking is different,
Speaker 1: even though the quote unquote notional leverage to thirty three
Speaker 1: cents is the same. And so again we think it's
Speaker 1: really crucial when you're taking this return stacking concept and
Speaker 1: considering it to think about what are you trying to
Speaker 1: stack on top of your portfolio? And for us it
Speaker 1: was really important in the paper to consider, Okay, everyone
Speaker 1: we know is already starting with the sixty basis, how
Speaker 1: can we make sure we're not just tacking on more risk?
Speaker 1: How can we really try to attack the core risks
Speaker 1: facing a sixty forty today? How can we help reduce
Speaker 1: that risk? And let me give you a perfect contemporaneous
Speaker 1: example for year today. I was just looking at up
Speaker 1: right now. So year today smps down four or four
Speaker 1: and a half percent. Right, the supposed protective layer, which
Speaker 1: is UH sovereign U S treasuries, the TLT is down
Speaker 1: around six percent. So both equities and bonds are down together,
Speaker 1: much like Gina had said, might happen an inflation regime.
Speaker 1: What is DBC doing the Deutsche Bank Commodity Index fund direction?
Speaker 1: And I think it is UM it's up six percent? Right,
Speaker 1: What are managed futures funds doing? They're up a couple
Speaker 1: of percent. This is exactly the type of diversification you
Speaker 1: need to protect against the blind spots of UM. So anyway,
Speaker 1: these are these are the reasons that it's for us,
Speaker 1: it's at a timely period for us to be discussing
Speaker 1: the stacking concept. It just allows clients to not have
Speaker 1: to if we're wrong, if Corey and I or any
Speaker 1: any gena is wrong about our our future predictions of
Speaker 1: correlation of equities and bonds, then they can get their
Speaker 1: six return and if we're right, they can protect some
Speaker 1: of that. One of the one of the things is
Speaker 1: that you're sort of optimized for these moments of time
Speaker 1: where things might move in lockstep. Right, So, how long
Speaker 1: of a window does this approach? Last four how long
Speaker 1: of a window does this approach as in your your
Speaker 1: view or your positing that these events like we've seen
Speaker 1: the last month are few and far between, and so
Speaker 1: you know, how how much of a benefit is it really? UM? Well,
Speaker 1: this is assuming this is again, I'm just going back
Speaker 1: to Gina's conversation. You think this is few and far between,
Speaker 1: but in fact, if you look back in the seventies,
Speaker 1: bonds and equities were highly correlated most of the time
Speaker 1: for over a decade. Right, So just because we haven't
Speaker 1: seen that in a rising rate environment a falling rate environment,
Speaker 1: doesn't mean we are not going to see it for
Speaker 1: a decade or more in the future. Um So, I
Speaker 1: don't know if you have anything to add to the
Speaker 1: correlation between bos necros or not. Yeah, let's let's assume
Speaker 1: we're wrong. That's always the best place to go. When
Speaker 1: you're an asset manager. You should probably assume that whatever
Speaker 1: narrative you're telling is wrong. What I would point to
Speaker 1: is in the last decade, right where this certainly wasn't true.
Speaker 1: I mentioned that c T A s, which dramatically underperformed
Speaker 1: stocks and bonds still had a positive return. Right. So
Speaker 1: let's say we're wrong and the next decade is just
Speaker 1: like the last, and stocks and bonds have negative correlations.
Speaker 1: It's a wonderful diversifier. Well, if we stack commodity trend
Speaker 1: advisors managed futures on top of the sixty forty it's
Speaker 1: still hopefully not a problem because that tends to exhibit
Speaker 1: an absolute return profile. It's actually one of the reasons
Speaker 1: in the paper we didn't stack raw commodities, because what
Speaker 1: you find is that while commodities tend to do well
Speaker 1: during periods of high inflation shocks, they tend to do
Speaker 1: quite poorly during disinflationary periods, and so what we wanted
Speaker 1: to stack on top was something a little bit more
Speaker 1: absolute return. So if that things do revert back to
Speaker 1: how they were over the last decade, and these fears
Speaker 1: about inflation go away, and correlations go back to being
Speaker 1: negative and nice, and diversification between stocks and bonds, what
Speaker 1: we're stacking on top is hopefully not a drag on
Speaker 1: the portfolio. So to your point, Joel, it's it's ultimately
Speaker 1: hopefully not an issue either way. What we're trying to
Speaker 1: stack on top is supposed to be absolute return. The
Speaker 1: drag issue is that's what There's been a bunch of
Speaker 1: downside hedge dtfs. Some have used a little VIX futures,
Speaker 1: which can be awesome when VIX is up, but man,
Speaker 1: they drag and they really just corrode your returns. Phdges
Speaker 1: that e t F. I mean it was underformed SMP
Speaker 1: by like over like three or four years because of
Speaker 1: that that drag um. So I this is I think
Speaker 1: what also makes the alts probably the sweet spot, right,
Speaker 1: because I also was wondering why not just use your
Speaker 1: THT on t LT. I have noticed t LT, which
Speaker 1: is twenty of your treasuries, has a real nice um
Speaker 1: record of off setting stock declines. But are you worried
Speaker 1: that even long dated treasuries could go down at some
Speaker 1: point to or um? I guess you ever think about
Speaker 1: just using long dated treasuries instead of alts or adding
Speaker 1: some of that in there. Okay, I think Corey can
Speaker 1: speak to this better because that's kind of his his
Speaker 1: first four into this return stacking concept. So Corey, why
Speaker 1: don't you take it? And then I have some thoughts
Speaker 1: on that. Yeah, I mean I think the big risk
Speaker 1: eric for us when we're considering this return stacking concept
Speaker 1: is what are the core economic risks that sixty already has?
Speaker 1: So if we start to take that extra capital and
Speaker 1: allocated to long dated treasuries, you probably get a profile
Speaker 1: that's a little bit more balanced from a risk contribution
Speaker 1: between stocks and bonds. But you're still introducing a lot
Speaker 1: more of that inflation sensitivity risk. Right, So again talking
Speaker 1: year to date, we are seeing that equities and long
Speaker 1: dated treasuries are both down at the same time and
Speaker 1: exhibiting positive correlation to one another. So adding more treasuries
Speaker 1: to the portfolio doesn't really do anything to solve the
Speaker 1: potential inflation risk that's inherent in the portfolio that's so popular.
Speaker 1: So if we go back and rewind the clock twenty years,
Speaker 1: that would have been a brilliant trade. But what we're
Speaker 1: trying to do is set us up today not knowing
Speaker 1: what the future is gonna look like, not having a
Speaker 1: crystal ball, and trying to develop the most resilient portfolio
Speaker 1: we can while still having that core sixty forty exposure
Speaker 1: that clients and allocators want. One thing is advisors, especially
Speaker 1: for the fee based advisors, which is where they get
Speaker 1: a percentage of the assets that swept over the country.
Speaker 1: Used to be they get a commission for the mutual fund.
Speaker 1: Now they get a percentage of fees. That's turned them
Speaker 1: all into like host obsessed people. They they that's why
Speaker 1: all the money goes to everything below ten bibs. Here
Speaker 1: you have this portfolio I would say it's probably all
Speaker 1: in at the level of maybe an active mutual fund
Speaker 1: back in the day, like it looks like it might
Speaker 1: be seventy or eighty. Maybe I'm wrong there, but let's
Speaker 1: just say you need to now explain why they want
Speaker 1: to replace something that's ten with that. And so you
Speaker 1: got I think you have your hands full. Your case
Speaker 1: is very compelling, though, I guess can you talk a
Speaker 1: little bit about how that's going. Yeah, I mean, let's
Speaker 1: go back to what the word return stacking means. If
Speaker 1: we're not stacking returns, it's not worth it. Right. This
Speaker 1: is this is the key thing. In the last decade,
Speaker 1: it has been very easy as a domestic advisor an
Speaker 1: investor to make money and the things that you are
Speaker 1: comfortable with and no it is s P Y and
Speaker 1: I e F for t lt so bonds and equities
Speaker 1: domestic have had a sharp ratio in theele of its history.
Speaker 1: It is some of the best returns we've ever seen. Ever,
Speaker 1: so when you look at your options bonds and equities,
Speaker 1: you can get dirt cheap ETFs and the regulators are
Speaker 1: coming in and creating complex language that might maybe have
Speaker 1: forced advisers to do that so I understand where everybody's
Speaker 1: coming from. We're trying to get people to see is
Speaker 1: the next decade. The next decade is going to require
Speaker 1: something beyond the mestay equities and hans. In my opinion,
Speaker 1: you're gonna have to deal with inflation. You're gonna have
Speaker 1: to deal with inflation and deflation and back to reflation again.
Speaker 1: There's gonna be a lot of volatility. For that, you
Speaker 1: need active management, which has been out of favor for
Speaker 1: ten years. That active management that we are proposing goes
Speaker 1: on top of these betas and stacked betas and stacked
Speaker 1: alphas need to provide enough value whereafter fees the stack
Speaker 1: is still above sixty. And so if you look at
Speaker 1: if you read the paper, we take fees off of everything,
Speaker 1: you'll see that in most years from seven to today,
Speaker 1: the the index of the approach stacks returns on top
Speaker 1: after fees, transaction costs and slippage, the index is the
Speaker 1: same thing you. I think we come in at one
Speaker 1: point to nine m e R or E ER sorry
Speaker 1: MR as a Canadian term expense ratio. That seems like
Speaker 1: a lot, But then you look at the index and
Speaker 1: it's sixty forty returns and then on top of that
Speaker 1: for the last three for the last year and a bit,
Speaker 1: it's been three stacked on top in spite of those fees. Right,
Speaker 1: So this is out of all the types of active management,
Speaker 1: this is the most straightforward. Do you care about your
Speaker 1: fees if the returns are being stacked every year? Right?
Speaker 1: I could be terry. What if I get an indext
Speaker 1: and and average five if the returns are above sixty forty,
Speaker 1: that's that's all you care about? Right? So I think
Speaker 1: for for the equity part of the portfolio, you're using
Speaker 1: something equivalent to the SMP, Right, isn't that the NTSX part?
Speaker 1: Well yeah, as and yes, where NTSX is SMP, but
Speaker 1: they're fun provide active but it's not what people think
Speaker 1: of where we're picking stocks. This is a whole different
Speaker 1: level of active. This is an asset allocation active. Well,
Speaker 1: you got your you have access to very, very cheap leverage,
Speaker 1: and that's the magic here. Let's start with that. What
Speaker 1: is different. NTSX provides us a hundred and fifty percent
Speaker 1: exposure to a balance fund you can't with the cheapest
Speaker 1: possible leverage you can get your hands on retail investors
Speaker 1: and advisors have not historically been able to get that,
Speaker 1: So that already is amazing structural alpha okay, and NTSX
Speaker 1: is twenty BIPs, which is which is on the low
Speaker 1: sides for right and then. But if you want that
Speaker 1: other protection, that active long short trend c t A,
Speaker 1: that active long short managed futures that requires daily trading,
Speaker 1: a team reconciliation, you're not going to find very cheap
Speaker 1: exposure to those things. But we believe that absolutely turn
Speaker 1: concept is important, and we found products that have the
Speaker 1: cheap spy and then stack on top of that in
Speaker 1: that structural outlet, stack on top of that that that
Speaker 1: trend and and active futures mandates. So it's a bit
Speaker 1: about it, just real quick again, just for anyone listening
Speaker 1: who thinks hedge funds, there's this sort of drumbeat of
Speaker 1: like how hedge funds can't beat the SMP, but you're
Speaker 1: bringing up absolute return. And for the institutional minded person,
Speaker 1: hedge funds are not being the SMP. Really isn't what
Speaker 1: most of them do. So when you say hedge fund,
Speaker 1: you're thinking something has uh hedges off a lot of
Speaker 1: the risk and ends up having like the same volatility
Speaker 1: as like as like bonds. Right, it's very low right
Speaker 1: in the ballpark of say, I don't know, maybe half
Speaker 1: of the SMP is that fair historically that's that's true. Um,
Speaker 1: I think zero coraline. You're looking at this managed futures,
Speaker 1: which have a unique profile really like they are. I
Speaker 1: think they're a category apart from this hedge fund category.
Speaker 1: I think hedge funds are generally long short equities where
Speaker 1: you're trying to hedge out the beta and just capture
Speaker 1: that differential alpha and that will have very very low correlation,
Speaker 1: very low correlation, very low volatility, and single digit returns
Speaker 1: that you stack on top. When we talk about long
Speaker 1: short c t a s and long short systematic global
Speaker 1: macros were now like even in the ets available, we're
Speaker 1: looking at the volatilities between eight and twelve, which is
Speaker 1: now similar to like uh, you know eight twenty sorry, uh,
Speaker 1: fifty fifty bond equity portfolio to sixty forty bond equity portfolio.
Speaker 1: Is that type of level of risk, and that's crucial
Speaker 1: because you want volatility as long as it's lowly correlated
Speaker 1: and and from my point of view, managed futures and
Speaker 1: c t a S out of all the hedge funds
Speaker 1: out there are the least correlated long term to a
Speaker 1: sixty forty portfolio. We keep going back to this core
Speaker 1: concept of what are you stacking on top? What you
Speaker 1: stacking on top, and what we're trying to stack on
Speaker 1: top are these absolute return alternatives that have historically been
Speaker 1: very disappointing when you have to sell equities to buy
Speaker 1: them right when you have to make this either or decision.
Speaker 1: The whole return stacking and concept is about turning this
Speaker 1: into a conversation about saying and instead of or, we're saying,
Speaker 1: can we get the sixty forty and these hedge fund
Speaker 1: type exposures rather than six or the hedge fund and
Speaker 1: I think in that sense it totally changes the conversation.
Speaker 1: I do just want to make one really quick point
Speaker 1: about the fees. Two quick points. First, I will say,
Speaker 1: with all the new products coming to market, again, if
Speaker 1: you read the paper, you can do this in a
Speaker 1: low fee way. It's just going to change what you
Speaker 1: can necessarily stack on top. Or you could do this
Speaker 1: with all E T f s, or you could do
Speaker 1: this with E T S mutual funds and go out
Speaker 1: and buy hedge funds as a compliment as well. You
Speaker 1: can take this concept and apply it to whatever fees
Speaker 1: you want. I think what is important Eric, you talked
Speaker 1: about having your cake and eating it too. With the
Speaker 1: sixty forty, I think of return to stacking is take
Speaker 1: the cake and putting some icing on top. Then the
Speaker 1: question is how much of that icing does the fees
Speaker 1: Ultimately your road and as long as there's icing left over,
Speaker 1: I'm not sure it really matters that there are higher
Speaker 1: fees there. You just need to make sure that they're
Speaker 1: still icing there. Okay, so really interesting time to introduce
Speaker 1: this concept to people too. I'm curious if we had
Speaker 1: you back on in the future, when are we going
Speaker 1: to know if you guys hit it? When are you
Speaker 1: gonna know? Um, Look, we've the index has been it
Speaker 1: goes back to November twenty twenty. Go to return stacking
Speaker 1: dot live to see the results. You know it's there.
Speaker 1: I think year today we are stacking in s your
Speaker 1: fifty basis points on top. I think I personally from
Speaker 1: um just from my macro view, which is always wrong.
Speaker 1: I think we're gonna be in an inflationary volatility environment,
Speaker 1: which means eighteen months of massive alatility three to six
Speaker 1: months of downward deflation, and you're gonna have to navigate
Speaker 1: that in a way where bonds and equities are gonna
Speaker 1: act very differently than they have in the past. And
Speaker 1: one thing I'll just we've been talking about how problematic
Speaker 1: investing in UM in alts and especially in managed futures
Speaker 1: have been to the last decade because of their single
Speaker 1: digit returns. From two thousand to two thousand eleven, the
Speaker 1: peak of the last commodity cycle, c t A s
Speaker 1: and managed futures were doing double digits every year, So
Speaker 1: the stacking goes way up. In an environment like that.
Speaker 1: I would say, if we're back in three years and
Speaker 1: my tradition comes through, we're going to be very very
Speaker 1: much ahead. Worth mentioning, we've we've talked about this paper
Speaker 1: throughout the conversation. You can find that at return stacking
Speaker 1: dot com, Rodrigo. Where do you find find more about
Speaker 1: the model? A return stacking dot live? Is it where
Speaker 1: you can get to see it? And now I want
Speaker 1: to ask a question that we always ask at the
Speaker 1: end of jillions. What's your favorite et F ticker other
Speaker 1: than around favorite e t F ticker other than my own? UM?
Speaker 1: I am going to have to say t y A
Speaker 1: from Simplify because it just it does such a good
Speaker 1: job of increasing that portfolio real estate that everybody needs
Speaker 1: to do some of that return sack. And we got Corey. Well,
Speaker 1: so I'm gonna answer this two ways. One, what's my
Speaker 1: my favorite e t F is nts X. That is
Speaker 1: hands down my favorite et F that's ever been launched.
Speaker 1: It's a super simple concept, but I think it's got
Speaker 1: so much power. My favorite e t F ticker that's
Speaker 1: been launched has got to be the new one from
Speaker 1: Simplify c y A, which is their tail hedging Cover
Speaker 1: your assets perhaps is the way we'll put it all. Right,
Speaker 1: there you go, Corey Rodrigo, thanks for joining us in Trillions.
Speaker 1: Thank you very much for having us guys. Thanks for
Speaker 1: listening to Trillions. Until next time. You can find us
Speaker 1: the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and
Speaker 1: wharver else you like to listen. We'd love to hear
Speaker 1: from you. We're on Twitter. I'm at Joel Webber Show,
Speaker 1: He's at Eric Falcinas. This episode of Trillions was produced
Speaker 1: by Magnus and Rickson. Francesca Levie is the head of
Speaker 1: Bloomberg Podcasts by