Animal Spirits Podcast - Talk Your Book: Return Stacking

Episode Date: March 23, 2024

On this episode, Ben Carlson and Michael Batnick are joined by Corey Hoffstein of Newfound Research to discuss: managed futures, return stacking, using leverage effectively, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Newfound Research. Go to thinknewfound.com for research. A lot of dorky quant stuff there, but really good. Return stacking stuff. Corey is king of the dorks. Yeah, he really is. Thinknewfound.com. I've been reading it forever.

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are. solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. We talked to King of the Dorks, Corey Hofstein, who is one of my favorite quantitative writers, Ben mentioned earlier, that we've, I don't know, Corey's been doing this for a long time, but I think I've been reading it for probably more than a decade. And he explains things in a way that is digestible for, let's just say, like the layman, right? That's what we are when it comes to some of this quantitative stuff. I feel like Corey also takes a lot of quantitative stuff that you and I have researched and read over the years and also pulls a piece out of it that you've never thought up before. Like his, his idea of,

of diverse timing of signals. Rebalancing luck. Yeah, rebalancing luck. Like when you rebalance, whether it's a tactical strategy or an asset location and how luck plays a role and how to diversify that. So it's like diversifying your diversifiers. Well, Corey's an interesting person in this business because this is a business. And Corey is an entrepreneur.

He's a business owner. And so later in the show, I won't step on too much of it. But we talk about like, how do strategies succeed? And it's not always the smartest or the fanciest. It's what will the market buy? You and I have seen so many strategies presented to us over the years where the person is the smartest person in the room and they lay out the strategy and they assume, I am so smart, people are going to throw me money.

And that is just not how it works. Yeah. So what Corey's done is he's spent a long time building a following, explaining his ideas, and the proof is in the pudding because they launched a couple of return stacking ETFs, which we talk about today, and the assets have taken off. So there's clearly an appetite, clearly a product market fit for what he's built at Newfound. So I hope everybody enjoys this episode with Corey Hofstein. We're joined today by Corey Hofstein. Corey is the president of Newfound. He's the founder. He's the portfolio manager of

of the return stack ETF. So I have that sort of right? Well, we don't have a president to the company, but I'll take the title. He's the vice president to the assistant regional manager. Corey, we're excited to have you on today.

We're going to talk about, I don't know if your life's work is too strong of a word, but you've been working on the concept of return stacking, portable alpha for a long time now. For people that are unfamiliar with this term, what are we about to talk about today? Yeah, so this is a heavy way to dive in. Maybe a little bit easier ways.

When you talk about the problem we're trying to solve. Sure, let's do that. I think that's really important here. A lot of investment products and concepts are trying to solve a return problem or they're trying to solve an income problem. The core concept of return stacking is trying to solve a diversification problem. So what do I mean by that? Well, in this wide industry that we have, there's very few things that we actually agree on.

You get a bunch of investment people in the room, and we can argue ad nauseum about just about every aspect of investing. split hairs, don't we? We absolutely love to. But still mostly agree. Yes. Still mostly agree on the big principles. But one thing we all agree on. I have yet to disagree with someone on this is the concept of diversification, that more

diversification is better, all else held equal. Now, that all else held equal is doing a lot of heavy lifting. But, you know, if you have nine stocks that you like and you find a tenth stock that you like, in expectation, adding that 10th stock to your portfolio is better for you. you will achieve your outcomes with greater consistency. And so typically we want more diversification in our portfolios. But when we look around the industry, and I'm sure you guys have better insight into this than almost anyone, the average portfolio tends to look a heck of a lot like 60% stocks and 40% bonds.

And you don't have a considerable allocation to things like commodities or gold or alternative investment strategies. it's hard to even get people to invest outside the U.S. when you're a U.S. investor and get that international diversification. And so a lot of my work is focused on, well, why is this the case? I think one reason is there's a little bit of recency bias. The last 10 years, right, stocks and bonds have done really well. And U.S. stocks and bonds have done really well. But as someone who's focused their career on alternatives, what I really came to believe is that the reason diversification is so hard is because for most people, it's a process of addition through subtraction. Now, what do I mean by that? Well, if you want to add gold to your portfolio,

I got to sell Apple. You got to sell Apple. Or you got to sell something, right? You got to make room. And what that does is it creates this really high hurdle rate. If you have to sell stocks and bonds to make room for gold or commodities or an alternative investment strategy, you're selling things that are typically more transparent, have a lower cost, or more tax efficient. And also from just a pure behavioral perspective, you have a more, a better emotional understanding of. Ben, you wrote a piece recently, I think it was this week or last week, 20 lessons over your 20-year investment career. And I think I would guess 19 of those were emotional, emotionally based. So many of the lessons are just the best portfolio is the one you can

stick with. And to your point, like the people who do make a change will toe in the water and they're like a 2% position, which doesn't move the needle anyway. Right. Right. And so what happens is these diversifiers become very hard to stick with. I'm going to steal a phrase from Cliff Asness. He was on Barry's podcast, Masters in Business when he talked about this. He said, you know, you get 10 years of underperformance in a diversifier from a statistical time frame, that's a blink of the eye. Like for us sitting in the ivory tower of asset management, that's meaningless, but from behavioral perspective, in emotional time, that's, that's an eternity to ask an investor, hey, take some of your hard-earned money and instead of sticking it in

stocks and bonds, stick it in this alternative that went nowhere for a decade, it's just not going to happen, right? And coin, when the diversifier is something like managed futures, and you have to explain to a client, a regular person who just goes to work and just wants to, you know, have somebody watch their money, sorry about this. that short wheat position really hurt last quarter. It's like, why the fuck am I short wheat? Exactly.

Exactly. And so it's nothing against managed futures go better otherwise, but even professionals would be hard pressed to stick with something like that that underperforms over a decade. Even if statistically, that's meaningless, guess what? We don't live in statistics. This is a real world. Layer on top of that higher fees, right? Less transparency, less understanding, easily understood for your average person,

less tax efficient, right? The worst part, especially with something like managed futures, is you can have a lot. loss and owe taxes. And that can be your, right? So then clients are going to really love you for that. So it makes structural diversification really hard and it leads to performance chasing. And we see that in the numbers, right? So we have these problems, right?

We want diversification, but it's really hard to structurally do. And so when we think about what is the ideal diversifier, it's something with positive expected returns. It's something that's uncorrelated to stocks and bonds, but more than anything, it's something we can stick with. Sounds like you're talking about Dogecoin. Well, right, this is where, you know, the magician pulls a rabbit out of the hat and says, and by the way, I've got the perfect thing for you.

This is where I should do my salesman pitch if I've found the perfect alternative investment. I actually would say, I don't think there's any alternative investment that perfectly fits that. But I think what we can do, there's no magic diversifier, but I think what we can do is think about a better way to build portfolios. So my proposal would be, what if instead of having to sell stocks and bonds to make room for diversifier, there was a process by which we could keep our stocks and bonds and add the excess returns of that diversifier on top of your portfolio. Effectively stack those returns on top so you can keep your stocks and bonds and get that additional return stream. And that's effectively

what we're trying to do with return stacking is allow investors to achieve a different means of constructing a portfolio so they can have their traditional asset classes that they're comfortable with, but introduce these alternative diversifiers as well. So even if its expected return is lower than stocks and maybe even lower than bonds or similar to bonds, if you add it on top, it's going to be additive and not take away from the portfolio. Yeah, exactly. So let's say you think stocks are going to be up 10%, and bonds are going to be up 5%, and gold will be up 2%. Well, you could still add gold on top and get that additional return stream on top of your stocks and bonds.

Where's that long mark coming from? Dude, can you hear that? It's comically loud. The dude literally just walked right outside my window. And he's like, I think he's got a leaf blower that he's literally blowing at my window. Okay. All right. So by the way, Corey, your explanation of that was much better than me diving in.

So well done there. Where does the return? Where does, where do you get the money? to how do you get a dollar 10 cents for a dollar or whatever it is? Yeah. So ultimately what we are doing is by stacking returns on top, we are using a form of leverage. And so we have to tap into financial futures markets to access that leverage. So for people who have never traded futures, this can sound sort of opaque and potentially

difficult to understand. So again, I'll try to use an example. we have a fund called the return stacked global stocks and bonds ETF, RSSB. And the idea here is that for every dollar you give us, our goal is to give you a dollar of global stock exposure plus a dollar of treasury exposure. Why is that useful? It's not that we think that that portfolio will necessarily outperform global stocks. Where it's useful is as a tool for capital efficiency.

So if you said, say, had a 60-40 portfolio and you sold 10% of your stocks and 10% of your bonds and bought 10% of this ETF, that ETF exposure would give you back both your 10% stocks and 10% bonds. But now you've got 10% cash with which you can do whatever you want. Within the ETF itself, to get you $2 of exposure, when you invest a dollar, we're going to take it and invest it in equities. and then we're going to buy U.S. Treasury futures contracts. And the leverage is embedded in those futures contracts. They're going to provide the total return of treasuries minus the embedded cost of financing for that leverage. And so when I said earlier, we're stacking the excess returns.

When I say excess, I mean in excess of sort of the short-term T-bill rate, which tends to historically be the cost of leverage embedded in these treasury futures. So does the cost of these futures, I mean, T-bills, money is expensive right now. So is this going to eat into return? Like, all else equal, you would much rather be paying 2% for the leverage than 5.5% and a quarter percent or whatever it is. Well, there's two arguments here. There's one argument which is expected returns are always in excess of the risk-free rate, right? Why would you buy stocks if you didn't think they were going to outperform T-bills?

Why would you buy bonds if you didn't think they were going to outperform T bills? Why would you buy anything if you didn't think it was going to outperform T bills? So at the end of the day, we should expect excess returns to always float with a premium on top of T bills. That's a very academic answer to your question. So I guess you could have said four years ago it was way cheaper to borrow, but you had no yield. So it was a similar tradeoff. Right. So let me give a more practical answer, which is, okay, we take our 6040, we sold 10% of our stocks and 10% of our bonds.

and we put 10% in RSSB, and now we have 10% in cash. If we leave it in cash uninvested, we will have a drag. If we put it in T bills, those T bills will basically offset the cost of financing, and we should have a return almost identical to our 6040. If we put it in, say, something like a managed futures fund, well, when you invest in a managed futures fund, which is an alternative investment strategy, they take the cash and they invest the cash in T bills,

And then they trade global futures contracts, both long and short, to try to create a positive return. The cost of the leverage will offset with the return of the T-bills, and you effectively get the positive, hopefully the positive expected return of the managed future strategy. And so, again, it's at the portfolio level, a lot of this stuff nets out. But effectively, what you're just trying to say is, do I think the thing I'm stacking on top? Do I think it'll outperform T-bills? If the answer is yes, then it might be an attractive thing to stack on top. So I'm sure a question you get all the time. All right.

So this is wonderful. I've got my 6040. I'm going to sell 10% of the stocks. I'm going to sell 10% of the ponds. I'm going to give you 10%. And now I've got 10 cents to do whatever I want. Well, Corey, what do I do with that 10 cents? Yeah, there's a lot of things you can do.

And it largely depends on your objective. I have some strong opinions here. But let's start with something simple. This is something that Pimpco has been doing in their Treasury Plus and more famously, their Stocks Plus programs going back. to the 1980s. And what do they do? They basically, instead of buying T-bills, they buy slightly riskier, slightly longer maturity bonds. They buy asset back, they buy credit, right? So you say, okay, if I think the T-bill's going to give me 5%, can I build a portfolio that's

slightly riskier that gets me 5.5%. And in doing so, right, if you can generate a little bit of excess return above that cost of financing, you're adding that return on top of your portfolio, right? So their source of alpha comes from picking bonds that they think will outperform T bills, but they're getting stock like beta with an alpha coming from bond selection. Very innovative. And again, this goes back. This is not a novel concept. This goes back 40 plus years that people have been doing this. Now, what I would say is, again, most people are starting at a 6040. I have in my futility tried to convince people the 60-40 is not the most well-balanced portfolio. But that's where almost everyone sits.

So starting there, the question becomes, do you want to add excess returns or do you want to manage risk? If you want to add access returns, I think it's all about finding a combination of investment strategies that you have high confidence in that can outperform cash with a good deal of consistency. And here, I think there's a lot of interesting things you can do. If you look toward some of the diversified alternative funds that are out there that are going to give you simultaneous access to a whole bunch of alternative investment strategies, AQR has one, Stone Ridge has one, you buy a handful of these funds and suddenly you're exposed to manage futures and long short equity and style premium and reinsurance and cap bonds and Bitcoin and all sorts of stuff within two funds rebalancing internally. There's a lot of great diversification. And if you think that's going to outperform cash, great. you've stacked all of those alternative returns on top of your core stocks and bonds as maybe a better way to generate excess returns, right? One of the things, one of the conversations I have with a lot of people is why do we all keep fishing in the same pond to beat the market?

Why do we always keep, instead of buying the S&P, we buy all these active stock pickers when all the evidence suggests, go read the SPIVA report, that you're unlikely to find a manager that's going to be with any consistency over any meaningful time period. but there's all these other asset classes that have positive expected returns that you don't have exposure to. Maybe we just stack those. The other way you can go is say, look, the 6040 portfolio, as 2022 laid bare, has some holes in it. Inflation risk in particular affects both stocks and bonds, and that is very relevant for retirees. Maybe we look to stack something that can help plug that hole. And that might be something like commodities or it might be a more active strategy like managed futures trend following that has historically done very well during those types of periods.

And so you can keep your core stocks and bonds and hopefully layer something on top that helps sort of smooth those sharp edges of risk that still exists in your portfolio. I assume managed features perform really well in like late 2021 or early 2022 when they could short bonds and also go on commodities. I assume a lot of those products did pretty well. Yeah. So what you saw in sort of early 2022 was a strong positive commodity. trends. Commodities tapered off through the rest of the year, but long U.S. dollar short

bonds, short equities was a really big trade across the Manch Futures trend complex. And I think the Sochgen trend index was up 25% in 2022, right? So, you know, it's not, if you carve out 10% of your portfolios and overlay and add some Manch futures, which are up 25%, you're only adding two and a half percent, right? You need to sort of think about sizing this. But again, it's, it's helping just smooth some of those edges and add in a diversifier. I assume the other one is you're talking to a conservative investor, and a lot of retirees are like this who say, listen, I know it's suboptimal, getting back to the emotional thing,

but I want to hold 5% of my portfolio in cash or 10%. You use your fund as an offset of that cash. So you go one to one. If you have 10% in cash, you put 10% in your fund and hold the cash in T-bills, and it works as an offset. That's kind of like a conservative trade-off as well, right? Yeah, that's another way you can do it, which is people like to have cash around,

for a number of reasons. There's advisors we talk to that for compliance reasons have to have cash around or they want cash around so that they can more easily take fees out. Clients want cash around for withdrawals. High net worth investors like to have cash around when they get cap calls, which can be at the worst possible time and they don't want to have to liquidate public investments. One of the things you could do is you could, you know, free up, sell some stocks and bonds, buy something like our return stacked global stocks and bonds fund for its capital efficiency, free up some of the portfolio and leave that part in T-bills, and effectively what your portfolio return should look like is the portfolio you started with. But now that those T-bills

are sitting there if you need them. And when you draw on them, you're effectively borrowing capital at the rate the U.S. government does, right, at the T-bill rate. And then you can just rebalance your portfolio back to sort of return the capital. You mentioned that Pimpco and certainly other institutional investors have been doing this for decades. What is it inside of the ETF wrapper that allowed this to be brought to the masses? Yeah, so Pimpco, as I said, started doing this in the 1980s under their Treasury Plus and Stocks Plus program. This became very popular among institutional investors. Ben, I'm sure you've heard of it in your prior career as portable alpha.

Something that got very popular around 2006 and then dwindled in popularity in 2008. And one of the problems here, right, is we're using leverage. And a lot of the institutions that were implementing this were effectively selling. equities and then replacing it with S&P 500 futures exposure and, you know, to get $100 of exposure, they only had to put up $10 of capital. And then they could take the other 90 and they started investing in hedge funds. And part of the problem was the hedge funds they were investing in were investing in illiquid assets and they were investing in assets that ended up losing money at the exact same time.

Equity markets lost money in 2008. In 2008, I learned about what it meant to be gated in a hedge fund. That was fun. And then you had the gating issues, right? So all of a sudden, you had, you know, you had a lot of leverage that was being used. These institutional investors had to come up with capital to post margin for their leverage, but weren't able to rebalance out of their hedge funds. And that's a real problem.

So the way we've tried to structure this is say, look, you really only want to make sure, if you're going to use leverage, you've got to match liquid with liquid. You can't be matching liquid with ill-liquid because then you can't rebalance. But the real innovation that allowed. So sorry to cut you off. So you don't want to do this fund and then put the extra. access in private equity or something. Yeah, or real estate or something like that.

I mean, you can, but you don't want to do it in large size because rebalancing your portfolio is going to be almost impossible. And again, you want to be able to rebalance here. So we like, for example, stacking things like manage futures, liquid alternative strategies that we can easily rebalance in and out of. To your question, Mike, what allows this in an ETF today? There was a rule passed by the SEC in, I believe it was February 2020 called the 18F4 rule. And it might surprise some people, but the SEC had never really provided clear guidance as to how derivatives could be used within mutual funds or ETFs.

They were used, but there was no hard and fast limit as to how they could be used, no concrete guidelines as to how much leverage would be tolerated by regulators. The 18F4 rule, or what's also called the VAR rule, provided very clear guidelines for asset managers as to how we could use derivatives to bring products. like this to market and stay well on sides from a regulatory perspective. How does this go wrong? What's like a really lousy environment? What should investors that are new to this be aware of? Because it sounds like a free launch. Of course, that doesn't exist.

So what are some of the things that might be obvious to you, but less so to the listeners? So we mentioned the phrase is portable alpha. The other thing this is called is capital efficiency. I love the term return stacking, which came from my colleague Rodrigo Gordio, because I really hope it illuminates the concept that this is. is we're adding returns on top. So if you have your 60-40 portfolio, we are ideally stacking additional return streams. That can be both a good thing and a bad thing, right? If you have your 60-40 portfolio and what you stack on top loses money at the exact same time as your

existing 60-40 portfolio, you're going to lose more money on the way down. So for example, what I wouldn't do necessarily is be a conservative investor, use the capital efficiency to, to open up 20 or 30% of your portfolio and then take it and put it in, I don't know, Bitcoin or take it and put it in the NASDAQ, right? All of a sudden, you've massively increased your equity exposure, but you haven't created any diversification benefit in your portfolio. At that point, it's just leverage. At that point, it's just leverage.

And leverage isn't a bad thing. I know leverage gets a really bad rep. Leverage shows up at every major financial catastrophe. But the thing I like to say is leverage always shows up with its friends ill-equipped. liquidity and concentration, right? You talk to a lot of advisors, so how do you explain the concept of leverage to them in this structure? This is leverage without a margin call.

This is leverage without a margin call. I mean, look, within the fund, can we get margin called? Absolutely, but we're trying to use a very prudent amount of leverage, and we're matching liquid things with liquid things. So here's an example, maybe a little bit more extreme, is we've got a fund called the return stacked U.S. equity and managed futures ETF, RSST. Every dollar you give us, we're going to give you a dollar of S&P 500 exposure plus a dollar of managed futures exposure. And so it's a 13, 14 vol manged futures program.

That's a high vol ETF. The vol of that product is around 19%. Ideally, over the long run, these things are uncorrelated, but in the short run, managed futures might see positive trends and equities and load up on equities at the same time. So today's a perfect example. We have a decent amount of equity exposure in our managed futures program because there have been really strong trends in equities. If equities suddenly sell off tomorrow, our fund would have more downside risk to it in equities. Can you get margin called? Well, so long as we have sufficient cash buffer to meet margin, and then so long as we can sell the asset that we're

stacking on top of, in this case, the S&P 500 to come up with more cash, it shouldn't be an issue of having margin calls. And again, that's what makes, in my opinion, this structure so different than what we saw in something like 2008, by only matching liquid things with liquid things and creating a stack where the base is something that we feel comfortable we can sell in any market environment to come up with cash, we really reduce the risk of meaningful margin calls. One of the things that you've mentioned several times on this show so far are managed futures. And managed futures can go long and, not end or, can go longer short, bonds, commodities, currencies,

equities, these are all futures contracts and primarily are using trend and everyone measures it probably somewhat differently. It's been a tough, it had been a tough decade prior to 2022. Do you think part of the reason is competition or is it just, was it just funky dynamics? Like, do you think that we can return to sort of like the heyday of managed futures where Paul Tudor Jones cut his teeth? Or what are your thoughts on the strategy in general? Yeah. So managed futures, as you point out, as a strategy that can go long and short global futures contracts, equities, bonds, commodities, and currencies. And then there's also a big fat tale of sort of what are called alternative markets.

You get some managed futures managers that'll go long and short, apples in China, or French power or Mongolian interest rates, some really weird esoteric stuff. AQR, for example, has started going long and short, the value equity factor. So you get these sort of structured trades and alternative markets that also get lumped in there. When you look towards the 2010s, the very unsatisfying answer to your question is, why did trend following do so poorly? There just weren't trends. Yeah.

Right? Which is an unsatisfying answer. I think why weren't there trends is really sort of that second layer. Yeah. So I guess that's what I'm asking. What do you think drove that part of it? Could it be buyers and sellers influencing that or what are your thoughts? So there's sort of two sides of this.

Was there crowding? We saw a huge influx of capital post-2008 into this space, was there crowding. We got the space up to about $300, $350 billion, which really in the scope of global futures markets is a drop in the bucket. So it's hard to say it was crowding, especially when you look at the managed futures category as a whole. There's an enormous amount of performance dispersion among managers because they all implement things so differently. And so from that sense, you're not seeing a huge amount of crowding into the, same identical strategy that's causing an erosion of the premium necessarily. And I think 2022 made it obvious that it wasn't the size. It was once there were really strong trends that

emerged, all of these managers tended to do really well. Also, don't, don't, correct me from Ron, I would assume that commercial hedgers and a lot of these commodities dwarf speculative hedgers or speculative traders. Yeah. I mean, it depends, it depends on the contract for sure. But yes, they play a very important part, especially in different seasons. Not that it's the whole thing, but isn't a 5% T-bill rate also really good for these kind of strategies? Well, these are cash plus strategies, right? So, again, going back to that question of when you stack things on top, you know,

manage futures, you're getting the cash return because all of the collaterals and being invested in T-bills, and then they're running these long-short futures contract strategies. In the 2010s, cash was returning nothing, so you didn't get that cash portion, but also it meant, you know, from our perspective, from a stacking perspective, the cost of borrowing was also basically nothing. So those things offset from our perspective. I just look at the excess returns because that's really what they're doing from an active return perspective. And I think I'll lean on AQR's research a little bit here. I think Aunt Eilman has done some nice work here. It just basically what seems to show up is there was a lot of emphasis.

on Fed control, global central bank control of the global economies coming out of 2008, you had a ton of intervention. And it just seemed to prevent meaningful trends from taking off anywhere in the global asset space. It doesn't mean there weren't spurts of trends, like 2014, 2015, there were some pretty strong trends. And if you look at the return patterns of managed futures managers, they did quite well over that period. But for the most part, in commodities and currencies, strong.

wrong trends just didn't seem to persist because there didn't seem to be enough macroeconomic volatility. As we've seen the reemergence of macroeconomic volatility, both in geopolitics and inflationary pressures and economic pressures that are playing through into both commodities and currencies, you're seeing returns in the space again. I have a two-part question. I'll do one at a time. So first question, Corey, you've been doing this for a long time. When I say this, I mean specifically writing about these concepts. These are not new concepts to your listeners. You've done a ton of great work here. So you launched these products not too, too long ago. How has the response from, I'm guessing most of your allocates are

advisors. I'm guessing that's where most of your flows are coming from. Has the response or the reception been, has it exceeded your expectations? Are you disappointed? Talk about that part of it. Oh, that's definitely exceeded my expectation. So we launched three funds last year. You're right. It probably took me longer to launch these funds than it should have. I'm a slow learner. And we got them out the door. We have a bonds and managed futures fund, a stocks and managed futures fund, and this global stocks and bonds fund. And those three funds collectively as of today are now above $200 million.

Amazing. The global stocks and bonds, which we launched in December, so just three months, four months ago, is $75 million. The stocks of managed futures, which we launched last September, just over it's six months now, is $75 million, and the bonds and managers is just over $50 million. So we're very happy with the reception. Our plan here, we think that this is a whole new category of product. We're hoping to bring at least three funds to market every single year over the next

couple of years because we think there's so many things that can be stacked together to continue to give investors the flexibility to create the types of portfolios and introduce the type of diversification or additional return streams that they want. Explain to me the bonds plus managed futures. What is the scenario that would grant that strategy? So again, I think the way to think about this is it doesn't really matter what the basis, right? So let's say I've got a stocks and managed futures and a bonds of managers. A lot of people would look at those and compare returns and say, well, stocks are outperforming bonds.

Maybe I want to be in the stocks and manage futures. From my perspective, if I've got a, again, a 6040 client, I can say, and I want to just add managed futures to their portfolio, I might be indifferent as to whether I sell some bonds and buy the bonds in Manch Futures Fund or I sell some stocks and buy the stocks in Manch Futures. Futures Fund. One of the conversations I have with a lot of advisors is one of the things you want to be considerate of is the internal diversification of the fund. So stocks plus managed futures, stocks and managed futures have more similar volatility characteristics. That fund is going to behave less like stocks or managed futures. It's going to be its own unique dynamics, whereas bonds

and managed futures is going to look a lot more like a managed futures return because the managed futures component is a lot higher of all. And then so from a, from a, from a client behavior line item risk perspective, often what I want to say is if you want to stack 10% managed futures, sell 5% of your stocks, sell 5% of your bonds, by both funds. And the net effect is you'll get 10% overlay, but you'll have two different funds that are contributing that. The last piece I'll say there is there are some people who are more active in their stocks. There's some people who are more active in their bonds.

By giving people the flexibility to choose what the basis is that they're stacking on top, again, just gives them more control of their own portfolios. So if you're making a portfolio change, if it's a taxable account for a client, then it's probably easier to shift out of bonds right now, too. Right. Part two of my question, Corey, you're one of the smartest people in this industry that I know. You're also an entrepreneur.

I'd love for you to share some of the experiences and the knowledge and wisdom that you've learned about what it takes to make it in this industry because it's definitely not for better or for worse. It's not the smartest person or the one with the most off or the best. best product. It's what exactly? What, what, what, uh, what do you contribute some of your success to and what, looking back in some of your failures, like just, just some, some parting wisdom for young budding entrepreneurs in the space. First of all, flattery will get you everywhere with me. So thank you for that. You guys, honestly, you guys are probably better

suited to answer that than I am with, with, with all your success. Oh, stop it. But, but on my side of the industry, right, the asset management side, I think for all my supposed intelligence, I've banged my head against the wall far too long with trying to create products that were far too complex. And I don't think I had a deep enough appreciation for your side of the industry and how you think about building portfolios. And the trials and tribulations you go through of trying to make those portfolios both optimal from a return and risk perspective, but also optimal from a client behavior perspective. And I think a lot of the products I initially brought to market lived in this no man's land of complexity that it was too difficult for people to understand. And because it wasn't backed by a large firm with a whole lot of capital, no one ever wanted to touch it. When I talk to people about launching ETFs, and I talk to people about that pretty frequently, the thing I always talk about is like your distribution plan ultimately matters a whole lot more than your investment strategy.

The unfortunate reality is asset managers are kind of a commodity. I can name five great quantitative asset managers off the top of my head that could probably do exactly what we're doing, right, without much difficulty or effort. So ideas are a dime a dozen. We're all sort of commoditized. I think you really have to be thoughtful about the distribution plan of all this and how you're going to bring it to market and how you're going to position it and how you're going to communicate it and how you're going to keep communicating it. That's the part of asset management that none of us who like doing the investment management side ever want to deal with or talk about.

Well, because these are very different personality types. Most of you nerds are your nerds. You have brilliant minds, but this is not a – that's not what determines success in this business. I mean, I will tell you, the recent piece that I published in the Journal of Alternative Investments about rebalanced timing luck and option strategies did not raise a penny for me, right? I mean, I'm not –

Save some for the rest of us, please. Yeah, I'm not sure 10 people read it. And I'm incredibly proud of that piece of literature. I think it actually truly contributes to moving the space forward for academics and institutional investors who are going to read it and implement it. But that's never going to help you run a good investment firm. Like running an asset management firm is a business. And having a good investment strategy is only just one small piece of running that

business. And I think for anyone who wants to launch their own firm, they need to be really realistic about what the business strategy is, not just what the investment strategy is. Corey, for people that want to learn more about return stacking and how you might fit in their portfolio, where do we send them? Returnstacks.com is a great place, and you can also find me far too frequently on Twitter at C. Hoffstein. Well, Corey, congratulations on all your success.

It's been awesome to watch. And you are moving the industry forward and you're doing great stuff. So congrats on all your success. And thanks for coming on. Really appreciate it, gentlemen. Thank you so much. Okay, thanks again to Corey. It's too bad this wasn't on a video because you could have seen Corey's luscious mustache.

It was just great. One of these times, I'm going to show up to animal spirits with a mustache. I can't grow facial hair. I'm very jealous. It's okay. You know, my brother has a giant beard. My brother's like a woodsman, and I got nothing. You're definitely not a woodsman.

That's for sure. Go to thinknewfound.com to learn more about Corey and all their strategies and email us Animal Spirit. at thecombonneuse.com.