The Derivative - A Four-Stack Pod, talking stacking assets with Return Stacked ETFs

Episode Date: March 20, 2025

This episode of the podcast piles on the knowledge about "return stacking" - the investment approach that lets you layer alternative assets and strategies on top of your traditional portfolio, like a perfect investment sandwich. Jeff Malec has stacked the deck with FOUR financial heavyweights - Mike Philbrick, Rodrigo Gordillo, Adam Butler, and Corey Hoffstein - each showcasing a "return stacking" ETF. We’ve brought together this team of experts to give you the blueprint for this innovative investment method.So, what’s the deal with return stacking? Think of it as the ultimate portfolio hack—layering alternative asset classes and strategies on top of your traditional stock and bond holdings. No need to shuffle things around or ditch your core positions—just stack those extra return streams like the ultimate investing sandwich.We’ll dig into the risk/return profiles and how these stacked strategies can take your portfolio to new heights. But wait, there’s more! To keep things light, we’re making our guests put their friendships on the line in a spirited round of "Choose Your Fighter"—because who doesn’t love a little friendly fire?Stack up, tune in, and SEND IT! Chapters:00:00–01:11 = Intro01:12- 20:00 = Return Stacking: Upgrading Portfolios Without Disrupting Core Holdings20:01- 41:47 = Stacking Stocks and Managed Futures for Diversification41:48- 01:03:10 = Capturing Futures Yield Through Return Stacking01:03:11- 01:31:00 = Stacking Bonds and Merger Arbitrage for Enhanced ReturnsAll things Return Stacking: Stacks on StacksReturn Stacking: From Theory to Practice - A 2024 Perspective - Blog postResearching the Risks of return stacking with Corey Hoffstein & Rodrigo Gordillo – The Derivative episode - PodcastWhat is Return Stacking? - Blog postDon't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠.Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

This is Mike. This is Rodrigo. This is Adam. This is Corey here to talk about return stacking on the derivative. Okay, everyone, we've got a fun one for you here. As teased there with the different voices you heard, we're stacking guests on this pod to talk about, you guessed it, return stacking. The return stack suite of ETFs have really taken off and we've stacked four separate mini pods, don't worry they're short, into one fully

diversified episode here. We recorded each of the four founders behind the concept separately, asking them to explain return stacking in their own words, detail one of their products, and then have a little fun at the end with a choose your fighter game. So let's get things going. We've got Mike Philbrick talking about stocks plus bonds, Rodrigo Gordillo talking stocks plus managed futures, Adam Butler talking stocks plus futures yield, and Corey Hofstein talking bonds plus merger ARB. Send it! Or should I say stack it? How are you Mike? I'm good. How are you doing? I'm fantastic. So gonna talk with you about Returned stacked stocks and bonds. Yep, right

But before we dive into the specifics of that, tell me kind of how you think of return stacking in your own words. Yeah, I think return stack portfolios aren't about market timing. We get a lot of that as we talk with people, well, when should I add it? How should I do it? It's not about that at all.

Rather, this is about a structural upgrade to portfolios that enables investors to build more diversification into their portfolios and unlock the potential for benchmark outperformance without disrupting their core holdings. And to us, that's really the key. It's helping investors get the benefits of diversification by including all those alternatives that are so diversifying, but without forcing them to give up their core stock bond positions, which we know they just know, love, and trust. And so the evolution of return stacking is that in a nutshell. And it's the idea of layering multiple sources of return within the same investment dollar.

So that instead of choosing between traditional assets and diversifying assets, investors can keep their core stock and bond allocations intact while adding exposure to complementary strategies. I mean, at its foundation, it really is a modern application of portable alpha, right? Which has been around a while. I'm sure you're pretty aware of that. The idea of large institutions having these core holdings of stocks and bonds, which they're probably never going to sell, to be honest. And that- Financial furniture, I call it. Yeah, yeah, right. Financial furniture. Exactly.

IBM stock over there in the corner. Yeah. You got S&P 500 or whatever it is. And that's also lazy collateral, right? It's collateral that you can do things with. And for most investors, adding the diversifiers is a challenge of the, it's a funding problem, right? You have to sell something to make room for these diversifying strategies. And that's where return stacking steps in and solves that by allowing you diversification without sacrifice. Investors don't have to give up their core holdings to add those alternative diversifying strategies or asset classes. We've packaged them together and prepackaged mutual funds. They're simple and accessible. And we're going to talk about

more of the RSSB or the Returned Stack Global Stocks and Bonds ETF, which allows investors to kind of build their own adventure if they don't like any sort of the pre-constructed portfolios that we have. And talk for a sec, you got it on the website, ReturnedStackedETFs.com. You guys separate out this one, we're going to talk about versus all the others as capital-efficient core ETFs. So is that just because there's not alts in there? It's stocks and bonds? Correct. Correct. It's that. So we've got the capital-efficient core ETF suite, which is exactly that. It's about building your own adventure. And we'll dig into it a little

bit more, but if you're getting a dollar of global stocks and you're getting a dollar of US bonds for each dollar you add to RSSB, this allows you to kind of build your own alternative adventure. If you don't like sort of the alts that we have, or you don't like trend, how are you? You want private credit or private equity? Listen, you sell down 20% of your portfolio, right? You add back 10% of the RSSB, thereby giving you the 20% of your portfolio. Like you add back 10% of the RSSB, thereby giving you the 20% back, 10% in stocks and 10% in bonds. But it also allows for this 10% cash position

for you now to build whatever alternative sleeve you want. If in fact, that's the goal. Sometimes an investor will come into an advisor and say, hey, listen, I've got a short-term funding problem. I need a couple million dollars out of my portfolio for my business, but I'm going to put it back in nine months. Okay. Well, do you own a balanced portfolio of stocks and bonds? Because what you can do for that investor is say, well, let me give you that. Let me buy some of this return stacked stock and bond ETF so that I replace the exposure for you. And now you've borrowed to fund your business over here at basically SOFR. When you're using those futures markets in order

to achieve the leverage, you get the cheapest leverage on the planet. You guys running into, right? Because before these products, I would go to my broker and be like, hey, I need a portfolio loan, right? I need a stock loan on my book, which is six, seven, 8% depending where you are. Yeah, it'll be prime plus four, five. Yeah.

Right? And so first prime. Right. I mean, it's basically the prime lending rate between institutional banks. So I hadn't thought of it like that. That's interesting. Like, hey, this is a portfolio loan replacement, much cheaper. So I have that a million dollars. I need 200 grand to whatever buy a condo somewhere. Instead of just, hey, can I borrow 200 K and pay you

8%? Let me sell out the 200K. I'll put a hundred of it back into RSSD. You'd sell like 300K? 300, sorry. Yeah. Put a hundred back, 150 back, and then I free up that cash to do what I want. And I still have the same exposure. Love it.

Precisely. So it can act as a way to generate cash in the portfolio, as well as, you know, adding those strategies that you may want in the portfolio to either diversify the portfolio a little bit better or outperform benchmarks. You know, that's the other thing is stock picking is a really tough game, as we will all admit. And if you look at the history and the various studies that are done, stock picking is a hard way to outperform. Creates a lot of tracking errors as well. When you're adding alternatives, you really only have to beat the cost of financing in order for those alternatives to be a creative, right? Because you're keeping your stock and bond beta.

So 2024 is a great example. S&P is up 25%. Most alternative strategies aren't up 25%. They could be anywhere from zero to up eight, call it just for example purposes. So if last year, 2023, before 2024, you sold 20% of your S&P 500 or whatever it was that you were tracking and you bought the alternative, you didn't get the 25, you sold 20% of your S&P 500 or whatever it was that you were tracking, and you bought the alternative, you didn't get the 25, you got the eight, call it. So now you have 17% tracking error. Rather, let's replace those core stocks and bonds to alleviate the tracking error behavioral vulnerability that the client has because their neighbor got the S&P return. And now let's add back those core alternatives. And then we've created the cash for that or

betas. We've created the cash for the alternative now. And all the alternative has to do to add value is beat the cost of financing. Right. There is a cost of financing. We talked a little bit about that, but it only has to be that cost, that three or four percent, wherever it is today. Right. Not many people are adding alternatives to underperform T-bill rates. Correct.

And so you've got your core stocks and bonds in the 2024 case where you did the whatever that half stocks and bonds was, 12 to 13%. So you didn't have that under performance and you've got the extra 8%. So let's say it was 8 minus 3 cost of finance, you had an extra 5% in that example. And then are other people using it like, okay, I don't really need to free up any cash. I just want more exposure. I get two for one. Yeah. I mean, yeah, of course. I mean, you know, and in this case, we're matching dollar for dollar. So, you know, you're adding stocks, but you're also adding bonds, which, you know, have come back

into fashion since the middle of January. I've been in a lot of conversations about, we don't want bonds anymore. And, you know, just when bonds start to act, as you would expect them to act in a bit of a growth shock. So 2022 was a bit of a different experience. We had that growth shock, but with an inflationary angle. So bonds also were feeling a drawdown. Yeah, you beat me to it. I was going to ask you, aren't bonds dead? Why did you guys put bonds in this thing? Well, the funny thing is, again, if I circle back to conversations mid-Jan, bonds dead.

Two weeks later, hey, have you got anything that stacks bonds? Yeah, right there. Right there under core holdings. Yep, absolutely. And then is it global bonds as well or no? No, it's US. It's a US treasury ladder and global stocks. And then what's the,

what are you targeting the duration on the bond ladder, on the Treasury ladder? It ends up being in that seven to 10 range, but it's just a ladder of the- So basically matches up with ag essentially. Yes, correct. And then this other piece of it, which is also approved pressure.

So far this year, why would you do global stocks? Just do S&P, right? So what was the logic there? So some of the logic was there is already some products that do just the S&P. But also as your intuition sort of points to, the global market is largely dominated by US stocks at this point. So to add the diversification potential for what is 30-35% of the world market cap at this point, I think is a solid thing to think through, especially around the edges. The portfolio of the advisor who's looking at this, I don't know how much S&P they have,

the portfolio of the advisor who's looking at this, I don't know how much S&P they have, but given things like a domestic bias, it's gonna be lots. So adding a little bit in the global side, we think was a great opportunity to slide in a little bit of diversification. And again, cloak that into one ETF, give you a broad global footprint.

Because you're not gonna do obviously, well, God bless, I hope someone does 100% of their portfolio in this or 50 to create 100. But you probably wouldn't do that. You're probably looking at allocations in the 20 to 30% range in order to accommodate 10 to 15% of alternatives. And adding that back as a global portfolio to us is probably not a terrible call at this point in time. But who knows? But who knows? You're going to have lots of that in other parts of your portfolio. You may have NASDAQ and S&P. I leave that to the individual investors and advisors to think through that. We just wanted to add something slightly different. And as we expand the suite, I would say things like a US option is one that's contemplated

down the track. You have a situation in the world today where you look at the size of the GDP versus market cap coming from the various sectors of the world. G7 is not the largest GDP producer in the world. It's actually China and India and the BRIC type countries have actually surpassed. The not market capitalization obviously of what manifests out of that GDP, but GDP. Yeah. BRIC, let's stack some BRICs next.

Yeah, yeah. LEGO BRIC. Possibly, like these are all things that will come and go with markets and the demeanor in markets. I'm sure that if we'd launched this in sort of 2002, three, four, you know, there would be less emphasis on US markets. There would be more emphasis on those international and global markets.

There'd probably be a real desire for commodity exposure. But those are the ebbs and flows of the market. We will produce products. And what you need to give them what they want. You can't create something people don't want. Correct. So talk, we got, we're stacking these all day today. So talk, we'll wrap it up in a little bit. Talk about the risk return profile. Like this is supposed to be, look like 60-40. It's going to

be double 60-40? What is the- It's going to be double 50-50. Got it. So what we found with- Do you get a little rebalancing premium? Be a little better than... You do, you do. And we have bands around 5% to rebalance back and forth

between stocks and bonds based on what's going on. So it's not a 50-50 every day. There's a band of 5% and when it gets to the band, we bring it back in. So allows for a little bit of drift in the portfolio. But it truly is, you know, $1 of global stocks and $1 of that US bonds. So you're getting those $2 in your portfolio. And so it's going to have the risk and reward of that $2 exposure.

Now, remember, I don't think people will buy this off the shelf as a one-off, but they may, you're welcome to. So if you did that, the risk obviously is going to be higher than the balance portfolio by about double. By itself, right? Yeah. But remember what you're trying to do is add the alternatives. Right. Yeah. The dollar risk is the same with that too. Correct. Yeah. And so you're trying to think through, okay, well, yeah. The dollar risk is the same with that too. Correct. Yeah. And so you're trying to think through, okay, well, if I had no alternatives and just the stock and bond, how does that work in a drawdown year?

How does that work in years where we have inflationary shocks where commodities are doing very well or currencies are providing great exposures or softs? These are things that are traded or opportunities for people to invest in, whether it's our products or elsewhere. Right, so you have this opportunity for a diversifier and in a down year, that diversifier is gonna help a lot in the portfolio.

In those nine times out of 10, it's a normal kind of bull market up year. At least you don't have that tracking or that albatross of diversification that you constantly have to apologize for. So it allows you to cloak a little bit of the diversification. It's that funding problem I'm coming back to. Little sugar make the medicine go down. Yeah.

If you sold 20% in December 31st of 2023, that 20% probably did less than the S&P. Right? And that's the challenge with the tracking error. So let's put that back in the portfolio. Let's put those core stocks and bonds back in the portfolio and allow that cash to be there to provide that diversifier or that return enhancer to the portfolio. Love it. Simple, simple. We're going to end with some fun. Yeah.

Do a little Mortal Kombat style, choose your fighter. So who are you choosing and why out of the four return stackers? Yourself, Corey, Adam, and Rod, Rodrigo. So we'll jump right in. Choose your fighter, math bowl slash science fair. Who are you going with? I got it, that's a tough one. If it was just a math bowl, probably Corey, you include science in there and you include a little bit,

you know, some of the larger topics in science, I think I got to give it to Adam. Yeah. I mean, with some AI research projects. Yeah. He comes in with some stuff that's like, okay, yeah, here's the problem. Here's what we're thinking of. And then, and then Zen guru science physics guy comes in and says, well, you're faced with

this thing. You're like, Oh, that blew that up. And now for this next one, remember you can include yourself if you're so inclined. Choose your fighter beauty contest. Well, I don't know if you've seen Corey Hofstein's fighting the dad bod videos. That is a beautiful man right there. With my dad bod, I hate him for it. I'm like, come on, man.

So Rod presents pretty well. You know, we got a good looking Latino on our, on our, uh, on our staffs. And he always has the hair perfect and whatnot, but I have to say, uh, that the curls on Cory are, I think he wins. I think he wins the beauty contest. Love it. All right. Uh, choose your fighter, actual combat, a bar fight or something.

Yeah. Yeah. That's going to be me. Exactly. I'll take all three of those guys on anytime. We got love it. Adam with his lung thing. Corey's got somebody has to wear a helmet all the time. Now, Rod, you know, he's got some jujitsu. Maybe he's got a chance, but you know, we'll see. And last one, choose your fighter to lead the four of you in a K-pop dance routine. Oh, well, we're going to have to rely on the absolute mesmerizing Latino hips of one Rodrigo Gordillo on that. Plus, plus he, you know, with his children in that sweet spot of age, knowing and watching the K-pop,

I'm sure he knows a myriad of K-pop songs that he doesn't even know. And then you throw in his Latin, innate Latin abilities to dance. I think that that's the winner. I would not want to mess with him on that one. I'll just tell me where I need to step and clap. And you somehow weaved in all four of you. Good work. I think we'll leave it there.

You got any last thoughts for people? I think we've covered it. This is the RSSB that returns stack global stocks and bonds is really kind of a build your own adventure type of alternative or risk enhancing opportunity for the ETF. So it allows you, it allows other managers too. So let's say you're a long short manager and you're talking with an advisor or an RIA and you're trying to build that long short into the portfolio. Well, you know, why not allow that room to be created with the RSSB portfolio?

So rather than the individual advisor having to sell down their core stocks and bonds they love, you know, the opportunity is, hey, I don't, you don't have to do that to buy me, buy this other ETF, buy me. And away we go. So it really is a build your own adventure. And if you think creatively about it, if you need short-term funding in your portfolio, you're going to get, you know, better rates doing it there than you will elsewhere. And so it really is that core efficient ETF.

As labeled. Love it. Thanks so much, Mike. Always a pleasure. So you're going to talk about RSST, stocks and trend. That's right. But before we dive into those details, give us kind of explain the return stacking concept as you see it in your own words. Yeah, so basically the idea of return stacking is the concept of layering one uncorrelated and diversifying return on top of a traditional asset class like

a bond or an equity index. And so for every dollar that you would invest in a return stack product, you would get two dollars of exposure. And the value of this is that advisors and investors no longer have to play the game on hard mode, right? This idea of adding diversifiers by having to sell your favorite equities and bonds in order to make room in portfolios for diversifiers. For every dollar that you give us, you're going to get a dollar of equities and then a dollar of a diversifier, in which case you can just kind of sell a portion of your equities by this kind of return stacked prepackaged solution, get your equities right back and then stack the diversifiers on top. So that is

in a nutshell the concept of return stacking. I think it's fairly straightforward from the name. Yeah, love it. And so you're moving off hard mode into what's what's the equivalent mode? Easy mode? Easy mode. It's a yes and rather than a this or that, right? In the past you have to be like, do I want more equities or do I want diversifiers? In this case, you get to keep your equities or your bonds and you get to stack diversifiers on top, which in truth is what, you know, you guys have done a lot of work on this,

is what managed futures are ideal for, right? Yeah. And what institutions have done for decades to help them win the game, it's almost like cheating for them. Right, because then they can throw it in T-bills, they can do whatever they want and get that additional return.

They can do their 60-40 plus, right? And it's easier to beat that 60-40 when you're stacking completely uncorrelated returns. And some of the genesis of this we've talked about before, right, you were sick of banging your head against the wall and trying to convince people to sell their NASDAQ or whatever. Why would I sell my US equity holdings? Are you crazy?

Like, I love everything you're saying, but... Yeah, like that's it. It was the conversation was, I know. I know I should do that. I love everything you say, but every time I do that, I underperform the S&P especially in the last decade and my clients want to fire me and I'm spending too much time on the phone. It's easier for me to just buy a zero cost ETF and get whatever the returns were in 2021. We wrote the paper, 13, 16, I can't remember now, but it was a ridiculous, outsized returning decade and

advisors just couldn't do it and investors couldn't do it. So this concept of giving them that return plus a bit of something else, even if it was only 3%, was very attractive. Love it. So let's talk about RSST, Return Stacked. What's the official name? Give us the official name. Yeah, the official title is Return Stacked US Stocks and Managed Futures ETF. And so a few things there. I think I said earlier, Return Stocks plus Trend, but there's a nuance there, right? Not stocks plus trend,

stocks plus managed futures. So how do you think about that the managed futures the alternative piece yeah in this case it is managed futures trend right in a word and it's basically we're aiming to provide exposure to US large cap equities and we do that by simply buying an underlying ETF that covers the S&P 500 market leaving a little bit of cash there in order to have that as margin. We then top up the, let's say it's 25% more that we need for US equities,

we buy the US S&P e-mini contract, still using that collateral. We have 100% exposure to equities. On the managed futures side, we are allocating the rest of that margin is used across a couple dozen futures markets across equity, bonds, commodities, and currencies. And we are going long and short those markets depending on trend signals. And to do that, we're trying to replicate the managed futures space. So we're doing a trend replication approach. And then, so you guys have had your own trend models for a long time, right? Corey Hobson had those at Newfoundt. So this is a little bit different approach

of, hey, we're gonna just replicate instead of using our own signals? Yeah, and as you know, the managed future space has a lot of dispersion between one manager and another, right? So there's a lot of like, I have a better mousetrap than you. And for this particular product, where we're trying to provide just simple indices, you know, the S&P 500 is the base and then trend replication as the top, what we're trying to do is aggregate the industry as a whole, try to capture the main kind of signal that comes out of trend following and providing an index like return. So we're not providing any

of the resolve magic, right? And the our trend alpha that may or may not work and people could question. They can just, they can count on the fact that we are gonna be broadly correct and capture the big muscle movements of trends. Yeah. What if I want some resolve magic? Come on. Then you can put a resolve as a management. Yeah, exactly. So, but you're doing it both from a top down. This might get too in the weeds, we'll be quick on it,

but it's both a top down and a bottom up replication approach, right? Versus just a simple top down would be, I'm going to, maybe I can replicate it with euro dollars and gold and I just buy those two markets and it's close to what you get. So you're also doing it with actual signals that track the index. Yeah, I think what's what makes this offering slightly different than any replication model that we've seen on the market in the last few years is that most models that try to replicate are looking at price data of an index or a group of funds that they're following and then trying to extrapolate based on a regression analysis what the likely weightings across

a handful of futures contracts would be and then you use those weightings to try and replicate. So that would be the top down approach to trend replication. It's fairly reasonable. The idea there is not to be absolutely perfect. It's really tough to be exactly right. But over time, you get the big muscle movements. You eliminate the performance fees of those big managers. So there's a fee alpha there and you get some value.

Now, the bottom-up approach can't be done by anybody that hasn't already built out trend signals and runs trends. But in the trenches. Well, on the bottom up is basically saying, okay, we got all these trend signals that we know we can execute that we use all the time. We use them in a certain way. What does the broad industry use?

Like what is the look back period that on average they use? What type of signals, breakout signals, moving average signals, what do they use? And you can use machine learning as well to try to identify which parameters you should weight and how. And then the difference here is that instead of us looking at price movement and trying to reallocate those weights, what we're looking at here is, okay, we got a signal triggered based on, you know, the parameter weights that we extrapolated from history, right? So it's a bit more reactive. It's much more... it's just basically, it's just a basic trend signal. Yeah. And what index are you trying to replicate? So we're basically aggregating all

the major liquid managed futures funds out there using that aggregation to extract that trend. Versus the SOCGEN trend or SOCGEN managed futures or et cetera, et cetera. Yeah, I mean all of that SOCGEN trend is very similar to, you know, it's like SOCGEN trend captures the basic muscle movements as well. But we were just using a basket of

managers in order to do the same thing. But it's very close to if you look at the Soctane trend index, it will we will rhyme very closely with that. And then talk from in a kind of the expected risk reward profile of the trend piece in particular but then the combination as well, right? Yeah, so you know you got equities that in the last decade or so have just go up, yeah, 15% volatility, right? They're gonna do what they're gonna do. And then trend following is running anywhere between 10

and 13% volatility, right? That's kind of the range. So, you can see that the volatilities are matched which is pretty neat. Now the the common assumption is that okay I got 15 vol for one, I got 13 vol for the other, then a 1 plus 1 fund must have something close to 30% volatility. But when you take into account the diversification benefits of managed futures, which you which if your audience isn't aware, managed futures is out of all the categories in the hedge fund universe, it shows consistently to be the least correlated

over the long term, around 0% correlation equities and bonds, right? So when you add that non-correlation, and you also have that idea of crisis alpha, where it tends to have outsized returns when they're prolonged and pronounced trends like oh wait 22 yeah 22 um one yeah you what you actually see is that the average volatility is not 30 it ends up being something closer to 19 so a little bit more volatile but interestingly

your maximum peak to trough losses for the one plus one versus just the S&P 500 are small less. Yeah And so what you're basically Getting let's say that we expect managed futures trend To do three or four percent annualized for the next decade You're getting you're able to stack returns on top of the S&P, that 3% or 4%, while not necessarily stacking the maximum risk of the drawdown. And you're stacking in terms of average volatility just a little bit. The final thing I'll say is that it does mean that the extra volatility that on average,

every year S&P has some drawdowns, right? Anywhere between five and 10%, sometimes 15. On average, in moderate drawdown years, the stack will, on average, have slightly lower drawdowns for that year. But again, when it becomes extreme for obvious structural reasons, the opposite is true. Slightly lower meaning larger, so if the SP down eight might be down 10. Correct. Yeah. The opposite is slightly lower meaning larger so if the SP down 8 might be down 10. Correct. Yeah. So that's risk profile and the return

profile is again we have an expectation that trend is a real factor that it's driven by things like market structure and behavioral dynamics that are unlikely to change and if that is, and it is risk, right? You're taking volatility. And if there's risk, then you're gonna have a return. And our expectation is something to the range between three to 400 basis points on top of the underlying index that we're stacking with.

And my argument sitting in front of an investor would be even if it's minus 400 basis points, you still want these together, right? The end product's gonna be way better. Even if it's minus 400 basis points, you still want these together, right? The end product's gonna be way better, even if it's a negative carry, when it performs is when you want it. Well, that's it. And I think that is the other part

that we haven't really dug into. We've been talking about managed futures now for 20 years, I think I certainly have. And the pitch was always, look at that, the rough equity line of the S&P sometimes has these really rough periods look at this other line of managed futures trend it's also has some rough periods but look it's magic and when you combine them you get this combined line this is amazing you should do this and everybody's like yeah I should do that and then they do it the problem is that the clients don't see that third line.

The clients see this weird line that they don't understand and they fire, right? So the promise of the third line has always been there but it's been really tough to behaviorally execute. One of the benefits of pre-packaging these things is that you can tell that story and then deliver that third line. Yeah. Which allows for a bit more of a diamond hands. Not perfect but it's certainly much more palatable. Your third line, not the hockey third line. You're getting some of your Canadian roots in there. I love it. Commodities, there's heavy commodity exposure, inflation protection, so all of that normal trend stuff is kind of built into the pudding here.

Correct. I mean, the first key of having an opportunity to benefit from economic regimes is making sure you're getting exposure to the markets that are going to react the best to those events. And 2022 is a perfect example. If there's going to be trends in commodities, it's going to be during a period of persistent inflation shocks, which is what we saw during the Ukraine war and post-COVID. And of course, the best performers were

commodities, going long commodities, and then shorting equities and bonds. So it's the ability to have a diverse set of tools that we can pull on, tools meaning asset classes. And yeah, you got equities for bull markets, you got bonds for non-inflationary bear markets and moderate non-inflationary bull markets, and then you have commodities for inflationary regimes, and then you have currencies to deal with all the crazy macro dynamics that are happening with central banks taking now, finally,

different courses than they would historically when they were highly coordinated, right? So there's just opportunities to make money in a broader range of markets, and I always like to say that managed futures, if you have an allocation, it's probably gonna be the most diverse holding that you're gonna have in your portfolio because of that. And talk quick second, why the one-in-one? Obviously we're trying to stack them but right most

people might be coming from a standpoint of like well I allocate 20% to alternatives or whatnot so how do you solve that kind of math riddle for them? Well look the one-in-one is just to keep it simple for everybody and allows not only the simplicity of execution within an advisor's portfolio but also the simplicity of explanation to their clients. So the concept here is if you want a 20% allocation to manage futures but you want to keep let's say you have a hundred percent equity portfolio and you want to keep your Equity exposure. Well, all you have to do is sell 20% of your equity exposure buy our SST you get a hundred percent you get your

Equity exposure right back and then you get 20% of your alternatives stacked on top, right? So it's the idea here is not to buy this as a standalone as your whole portfolio Yeah, the idea is to say okay. How much managed futures do I want? You know, how much? Merger arbitrage do we have do we want how much? Manage you just carry which is another one that we that we have like you can kind of create your own combinations But the whole time you are able to kind of use that building block of like sell one buy one get two. Yeah approach So you're talking about those building blocks. It's kind of a this toolbox. Like what are some of the use cases? You're seeing actual investors advisors use it for yeah

I think there's I think there's a large group of individuals that really want to keep up with whatever the benchmarks are, right? So if they have a 60-40 portfolio, it's risky for them to reduce their 60 and 40 in order to add diversifiers. So the first case that we just talked about, perfect for them. Sell 10% of your equities, buy 10% of RSST, you get your equities right back,

you have a 10% stack as a diversifier. So now that portfolio looks like a 60-40-10, right? Basically stacking on top. But then you have a bunch of advisors and individuals that have been holding managed futures as a standalone, right? So they'd have something they want to, they don't want to increase their equities. They're fine, in theory, with holding alternatives. And they might have a portfolio that is, let's say, 40-40-20, right? 40% equities, 40% some bonds and 20% managed futures Well for advice is especially that 20% has probably been very painful, you know, we know it is it's very different

Yeah, and so how can we give them the same exposure but without the behavioral pain or at least helping minimize the behavioral pain? Well, we can do is you could sell your managed futures, okay? You sell your managed futures, you sell 20% of your equities, okay? And you buy 20% of RSST. So now the portfolio looks like... You just freed up 20% cash? Yeah, portfolio basically, it looks like you have, you know, 20% in RSST, 20% in equities, 40% bonds, and 20% cash. That's what the client will see and they'll probably feel a little comfort

that there's some cash on the sidelines and whatnot. But if you X-ray that portfolio, you've just reestablished the old allocation, but with a line item that is much easier to hold. If you X-ray that portfolio, it is 40-40-20, right? Because RSST tops up the managed futures portion. So you can still use return stacked ETFs and not stack, right? Not use leverage and instead use it as a behavioral tool to keep clients invested and provide them the diversification they need. And then with that extra cash, you can leave it in cash, you can put in a high-interest savings

account, you can increase duration in a bond, or you can leave it there as dry powder for when things really go wrong that you can easily deploy that cash into assets that you want to buy. That's why I really like that case study, the idea of return stacking without stacking to manage behavior is becoming much more. We'll come up with a clever name for that. You weren't privy to my conversation with Mike where we talked a little bit about that when we stacked before. I had never thought of it. That's a great use case instead of doing a portfolio loan or something like, hey, here's how I can get cash out. My worry is investors will just use it to buy boats and houses and dumb stuff, but

God bless them if they made the money they know or buy or buy more equity Yeah, exactly. But right like I hadn't thought of it like that at all So it's we'll have to come up with a clever name return stacking unstacking. Yeah Cool we'll end with a little bit of fun Gonna do Mortal Kombat style. I don't know if you ever played the game. Choose your fighter. I have. My god, I have. Too much of it. Yeah, out of the four of you, yourself included, uh, we'll start with choose your fighter.

Math Bowl slash science fair. Who you going with? And I think that would be a fight to the finish between Adam and Corey. But I probably will have to give Corey the edge because he actually went to school for quant finance and Adam just went to school to be a psychologist. Adam's arrived there. He didn't start out in finance. He did certainly learn all the quantity skills But I'm gonna I think Corey edges in there. Love it. Choose your fighter beauty contest

Mr. It's really I mean you got death to dad bod, you know posting on social media every yeah Nobody works harder at for the rest of us dads are like, stop it, come on. Nobody looks more, you know, in shape than Corey Hofstein. So he's got two for two right there. It's gonna be interesting if he chooses himself on that when we stack him here. Actual combat, a bar fight or something. Who you choose your. Now, the obvious answer for most people would be Mike Philbrick, right? Big defensive lineman, he still works out like a beast. He's got, he's just, he continues to pack on muscle at his ripe age. But you know, I'm a scrappy Peruvian that has done martial arts his whole life.

So I'm pretty sure I can get Mike in an armbar and get him to tap fairly quickly. Or maybe even a rear naked choke. He did throw out a mention of you in Jiu-Jitsu. And finally, choose your fighter to lead the four of you in a K-pop dance routine. That's gotta be me. Everybody will choose that for sure. I love it. Yeah. I may have done it once or twice already. There's, there's, everybody will choose that for sure. I love it.

Yeah. I may have done it once or twice already. All right. I mean, that's the YouTube. We don't, we don't want to see Corey working out. We want to see that. Awesome. Any last thoughts?

No, I appreciate the time and hope that, you know, if anybody has any questions, you can go to returnstack.com and you can see a whole plethora of content and information and blogs. We're putting out a lot of content and if you really have any questions, they're probably gonna be answered there but obviously you can reach out to the team if you want to discuss anything further. Love it. Thanks Rodrigo. Thank you. you. So we're going to talk about RSSY, return stack US stocks and futures yield. But before we dig into the specifics there, give us, been doing this with all your compadres, give us kind of the return stacking concept in your own words or how you kind of think

about it. Yeah. I mean, I like to say that return stacking avoids having to do additions or subtraction. So typically you want to add diversifiers to a portfolio. What do you need to do? Well, you need to sell down one of your beloved holdings, either your beloved NASDAQ, your beloved S&P, or your beloved bond aggregate. I guess that's not a thing. No one really loves their bond aggregate. Especially late. Right. In order to make room for these diversifiers. And what we've done is say, well, hold on.

What if people don't want to actually sell 15 or 20% of their core exposures in order to add those diversifiers because then there's a lot of regret when markets are steadily rising and the diversifiers are kind of doing their job, which means that they're not really tracking equity markets. So if equity markets are on a big bull run, well, you wouldn't really expect your diversifiers to also be on a bull run because they're not really acting as diversifiers then, right? So then that creates disappointment if people have sold in order to buy these diversifiers. So we say, well, hold on, don't sell, but rather you buy this fund, which gives you your core exposure back. And then we're just going to give you your diversifiers like icing on the cake right on top. Right. So you don't have this regret is what we call tracking your regret.

When your core the core markets continue to go on a bull run. Rather, the diversifiers can just do their own thing right on top of your core stock and bond exposure. And, you know, you don't need to regret anything. I love it. And I was expecting you to and thanks for living into it of like bring a little math into there too, right? Like your other guys are just talking about it conceptually, but tracking error. First time in our stack pie here, we've heard that. So tracking error, I think of it as opportunity cost. So really, if you want to get statistical about it, it's a way to reduce opportunity costs and or tracking error. Exactly. Yeah. I mean, I think opportunity cost is a really great way to frame it totally. Which is just on that equity piece?

Yeah. I mean, it's well, we've got a bond. Yeah. Yeah. But for RSS, well, yeah, I guess we're talking in general. Today, we're going to talk about the equity stack, right? But we obviously some people want to sell down their bonds in order to and then replace the bond allocation with the stack. Some people want to sell down their stocks. Some people want to sell some of their stocks, some of their bonds, and then replace the stocks and bonds with the stack overlay. We just try to create as many options as possible to, again, minimize that opportunity cost, however individuals perceive that opportunity. Tim Cynova Was there, when you guys were kicking around

the surround, did you ever think to call it like the toolbox ETFs or something, right? Like it really seems to me it's more of a tool set to be able to do all these different cool things than just like, here's this great model we've come up with. It's a great model and this tool that you can use. Yeah, I mean, that's a really good point. Resolve has been offering what we call systematic global macro, which is kind of like

blending all of the tools together in a single solution for going on 15 years, right? And what we've realized is that a lot of advisors and a lot of investors, they want to fine tune, they want to do their own thing. They want to make their own decisions about how much allocation to trend or to equities versus bonds or to futures yield or to other alternatives. And so by providing these stocks and bonds and then different stacks, so a trend stack or a carry stock or a merger or a stack, that gives the advisors lots of tools so they can blend them in ways that meet their own objectives and their own clients' objectives. So it's just a different approach. And you feel a lot of these advisors are portfolio wonks, they're kind of into the weeds and

all this stuff? Or is everyone just, right? Like, what's the target? Or who's received it best? The kind of nerdy portfolio people? The ones who, you know, it's, this is more of a technology than it is an investment paradigm, right? So it's, you get these early adopters.

Now the early adopters tend to sort of lean into more of a science, engineering, technical kind of background. But what's been amazing to see with the return stack suite is where some of our previous products, which are maybe a bit more complex and a bit more sophisticated, the return stacking just is a much easier way to understand this concept and much more approachable. And so we've left that gap from early adopters into the early majority really

quickly. And so we're starting to see advisors who maybe have less of a technical orientation, more of a client service orientation, but really appreciate the opportunity to provide differentiated products and potential return streams to their clients. They've really begun to pick up the ball and run with it under this new toolset, as you said. It reminds me of the old consulting line, I think, or can't remember. How do you eat an elephant one bite at a time, right?

So you had the whole elephant trying to force feed people. Now it's like, hey, just here's one bite at a time. I don't know why anyone wouldn't want to eat elephant. I've never eaten elephant, but it seems like it'd be a little rough and tough. I hear you. So let's dive into RSSY. So it's return stack stocks plus yield, which is what's the official name? Do you have it there?

Yeah, return, stack, stocks and futures yield, which is probably a term that many people haven't heard before. And it's actually not the way that the strategy that we run, the diversifying strategy that we run is most commonly referred to. I think you and I would be familiar with it as Managed Futures Carry, right? But we position it as Futures Yield because that's really what a carry strategy is designed to capture, right? So what is carry? Well, definitionally, it's the return that you expect to get from an investment if the price of the investment doesn't change. So if you buy a stock, often that stock will pay a dividend. If the price of the stock doesn't change, you're still getting those dividend cash payments coming out. And so you're still

earning a return in bonds. If the price of the bond doesn't change because interest rates don't change, you're still clipping the coupons of those bonds, right? So that cash is still hitting the portfolio. Well, you can invest in futures to capture that exact same yield. So if you invest in an equity index future

and that equity index, say the S&P 500 pays a dividend, then in order to minimize the opportunity for arbitrageurs to come in and make a free, to eat a free lunch, the return of the futures market that tracks the underlying equity index has to be the same as the return of the underlying equity index, right? And so what happens is when you invest... Index plus the dividend.

Yeah, exactly. The index plus the dividend, right? The total return of that. Or let's say you could just buy the S&P, SPY, earn the dividend, sell the futures short, just earn the dividend, lock it up. Without any price risk on the SPY. Exactly. So the dividend needs to be embedded in the return of the future, right? And it's the same in bonds, right? The coupon needs to be embedded in the return of the future. So it's a little bit different because if you own the future, you don't actually get

paid a dividend. But rather what happens is that the price of the future rises into the maturity of the future to deliver the same total return, including the payment of the dividend that would have been accrued from an investment in the underlying index. And it's the same thing with bonds. Love it. And then the confusing part is there's negative carry, right? So if I'm owning oil or maybe corn is an easier example, I have corn, I got to put it in a silo, there's cost to store that, all that stuff. So there's negative carry on certain commodities, I guess, could it be on financial assets also?

Yeah, absolutely. So imagine you've got, like we've observed over the last couple of years, well, maybe three or four years, we had an inverted yield curve, right? So typically, expect long-term bonds to have a higher yield than short-term bonds because investors typically will require a higher return to lock up their money for that long and incur the potential inflation risk and uncertainty. So in a normal yield curve environment, long-term bonds are expected to pay more than short-term bonds. And so it has positive carry. But we just went through a period where the Fed aggressively raised interest rates, but the long end of the bond market wasn't convinced that there was going to be an inflation problem.

And so for a couple of years, short rates were higher than long rates. And therefore, in fact, we wanted to be short bonds, short, longer bonds, because you weren't getting expecting to get paid that premium, rather you're getting paid less to own long term bonds than you are to just hold cash. It's the same thing with equities. If the expected dividend yield or potentially shareholder yield of equities is lower than what you're currently expecting to get on cash, then why are you taking equity risk? Why not just invest in cash and maybe short equities in proportion to the risk of equities in order to catch that difference, right?

So yes, commodities can have negative carry, in which case you want to go short in order to capture that carry, but that can also apply to financial instruments where you also might want to go short in order to capture the carry. And so add it all up in one thing. Futures yield is basically, hey, there's embedded complex math here. Maybe not all that complex, but for your everyday man and woman. Complex math, but the end of the story

is futures markets themselves provide, can provide a bit of a yield, whether going long or short in combo. So my brain goes to, how do you view that? Is it like a junk bond yield, right? It's going to be something different than treasury. Like what can a normal investor equate it to kind of think of, okay, this is a yield I'm going to get comfortable with. Yeah. So I mean, the yield on these instruments changes over time. Typically, you know, interest

rates maybe don't change as quickly as the price of equity markets or you know, there are definitely markets where the slope of the carry, so the expected yield that you might expect to get on an investment in a given futures market changes more rapidly than in other markets. But all we're doing is each day, we're observing both the direction and the magnitude of KRI that's offered across, a bunch of different equity index futures, a bunch of different global sovereign bond index futures,

a variety of global commodities and currencies. And we're trying to maximize our exposure to markets with very high carry. We want to maximize short exposure to markets with extreme negative carry, and just generally hold exposures to markets in proportion and in the direction of the current carry. So the portfolio adjusts each night by a little bit in order to adapt to changes in the carry

environment that have occurred from day to day. But do you guys think of it in terms of like, I'm aiming to be higher than T bill rates, very high rates, or it's just this is going to produce the yield it produces and so be it. Well, yeah, in general, you're expecting like you're investing in a direction versus cash typically. So if the funding rate on crude oil is higher than what you expect to go on the carry, then typically you'll go short. If it's the other way around, then typically you'll be long. So our expected carry over the long term is always in excess of cash. But that doesn't mean we're still... We can still be net long equities or net short energies or net short bonds or net long bonds, et cetera.

If we're offside on that over the short term, then the strategy can still experience losses. We're in a bit of a drawdown at the moment, which is totally normal in the context of, you know, we have a history on what this strategy looks like. So it's not a free lunch. But what's fantastic about it historically and structurally is that it has a very low correlation to the equity and bond investments in portfolios on average, but it has a similar expected return profile. So that's sort of the ideal setup for taking advantage of diversification and

eating that diversification free lunch, which is often elusive without the ability to stack products. So, you're looking at less of this is a kind of a bond replacement, more of like this is a true alternative non-correlated and you're really just looking to pair those two non-correlated assets together. Yeah, you know, one thing I really try to hammer home in all of these conversations is that trend following is magnificent. You know, we've got a very long multi-decade live history of trend following managers being successful and trend is the dominant strategy in managed futures. But-

Yeah, I got a lot of property on trend following Island. I know, right? Of course. I'm a card carrying member. I know it, as am I. What many don't realize is that for many decades, these same or many of these same managed futures managers also have been allocating to

carry. And so there is a long history of carry being highly complementary to trend following in futures. And so ideally, what we'd love to see is investors holding some trend and some carry stacked on the core equity and bond exposures that they know and love so much because they work so well together, right? They work in different ways at different times for different reasons. So they're just a wonderful complementary allocation. Talk a little bit about the risk return profile. So the carry is going to be a little bit more volatile. Well, we run around, correct me if I'm wrong. Yeah.

Yes, you run it around a set of slightly lower volatility than the trend strategy. Okay. So, but it'll have the same kind of look and feel experience for investors who are stacking it as the trend strategy, but it will just experience its highs and lows at different times because it's just being guided by a different set of signals. A lot of people have this, especially people that have been trading in markets for a while and have some

experience with alternatives, they hear carry and they think of those old fashioned currency carry strategies. You're typically borrowing in, you know, borrowing dollars or borrowing again, and you're buying the Mexican peso or the Brazilian real or these higher yielding emerging market currencies just to get the pickup and the interest rate differential. And for obvious reasons, those just isolating the carry strategy to emerging market currency carry has this or had this pro cyclical effect. It tends to have its worst months when, for example, the economy is at a downswing and equity markets are also having their worst. Yeah, have big left town.

Yeah. So we say it hurts when it hurts to hurt. But because we're trading, we're not just trading emerging market currencies, we're trading global equity markets, global government bond markets, a variety of different currency markets, and not even really emerging market currencies, but rather developed market currencies. These all end up diversifying the These all end up diversifying the exposures to those typical kind of cyclical risks. So when we look at, for example, past equity bear markets, managed futures trend, about half the time it does well in an equity bear market, but the other half of the time it kind of just muddles along or sometimes takes a bit of a hit. Well, this is the same with carry. Carry acts as a phenomenal diversifier, rises aggressively in some of the historical equity bear markets, but in others, it just kind of muddles along and in others, it kind of drops. But typically, both trend and carry have their best and worst performances during equity

bear markets in different bear markets, right? So just another reason why they work well together. Another piece of the elephant, if we will. And we'll post, we did a pod a year or so ago talking about really going deep dive into the carry and how this isn't the big nasty carry everyone's afraid about. So we'll put that in the show notes. Super. Any last thoughts before we move on and with a little bit of fun? No, I mean, honestly, I'm especially excited about this, this carry stack because it's

just really hard to get pure access to carry strategies in any other way. Like I said, the often managed futures strategies have a fairly large embedded exposure to carry. Trend still tends to be more dominant in the funds, but because they're so highly complimentary, it's just really great for investors to have access to both trend managed futures and carry managed futures. And again, putting them together in a portfolio. Is there a use case for, I mean, up to the advisor, up to investor what they think, but right to just use the carry one or you think it pairs best with the trend? Well, the great thing is that if you've got other preferred trend managers that you love,

then sure, keep your exposure to those trend managers, but now you've got something genuinely diversifying to improve your overall alternative allocation. I'll sum that up quickly in a different way I think about it. You have these old school trend followers, rather large volatility, big drawdowns, newer school European type trend followers, added carry, added some bells and whistles, filters to lower that volatility, create a smoother investor experience. So you're saying here, hey, this is that tool to lower that volatility, create a smoother trend experience. Yeah, I mean a peanut butter sandwich is fantastic, but a butter sandwich is even better. Even better. Awesome. We'll move on

and end with a little bit of fun. So, Mortal Kombat style. We're having everyone choose their fighter. Did you ever play? You know the game? There's a few, yeah, there's a few dimensions, right? Who's the prettiest? Well, well I mean come on. Yeah, no We'll start there. So yeah, choose your fighter you can select yourself. So yeah, choose your fighter for a beauty contest Yeah, there's four of us one of us is Corey Austin. So He's he's been a quite popular pick Choose your fighter for a Math Bull slash science fan.

Yeah, sadly, I think Corey would take us all in that too. You don't, I think you could win on some of the science stuff. Yeah, on the pure science stuff, I think on the pure math stuff, Corey would have me. God darn him. All right, actual combat, a bar fight or something. Yeah, I mean, I wouldn't want to go up against Mike Filbrick in a bar fight, both because he's,

you know, six foot four and 235 pounds of former defensive linemen. Yeah. Yeah, but also because he is dirty. He's like a hockey player, man. So you never know what he's gonna do. He'll win, he'll bite your ear off. Exactly. And lastly, choose your fighter, lead the four of you in a K-pop dance routine. Yeah, I think I might have a chance there. Nice. I definitely have more of the musical genes.

Now that typically comes out with karaoke. Okay, yeah. With the dance moves. But I don't know, I spent a lot of time dancing in clubs in my 20s. So I think- In Toronto everywhere. Yeah, mostly Toronto, yeah.

Never been to a club in Toronto, huh? Check that out. Awesome Adam, thanks so much. Any last thoughts? No, really appreciate you doing this series. I think this is a transformative technology. Can't wait to see how it takes off among a wider group of advisors

who are looking to do something different and more fruitful with client portfolios. And appreciate you helping to share that message. Love it. Thanks, Adam. Thanks for coming on with your our last stacker here, so we've had all the rest of your compadres on here But uh asked everyone if you could explain return stacking the concept kind of how you think about it and in your own words Yeah, I think What it is is less important than what problem it solves, but just to say

what it is, the core idea of return stacking is taking alternative asset classes and investment strategies and instead of having to make room in your portfolio to add those things by selling core stocks and bonds, return stacking is a concept that allows you to, for lack of a better phrase, stack them on top. And so you get an additional layer of returns on top of your portfolio. And hopefully through careful selection, you can add things that can both enhance returns and diversification of your core strategic asset allocation. And about the what it does for you, the more exciting part to you. I mean, that's what you, yeah, to me, it's a, it's a question of what, what are the benefits, what problem does it solve?

Right. And there's to me two key benefits. One is this idea that historically diversification has been this process of addition through subtraction to, uh, make room for diversifiers in a portfolio. You have to sell core stocks and bonds. And this introduces both a return problem or return estimation problem. What are you selling to make room for those alternatives? Is that the right mix? And it also introduces a potential behavioral problem.

Clients are typically more comfortable with core stocks and bonds. And when you start talking about adding alternatives, if those alternatives are uncorrelated and they don't perform the same as core stocks and bonds in a period that core stocks and bonds do well, it can be hard for people to stick with that diversification. And so what return stacking hopes to achieve there is by layering the diversifier on top, not only are you getting that additional return stream without having to sacrifice those core stocks and bonds, but you're making it more palatable for the client because they're able to retain those core stocks and bonds. The sort of icing on the cake, if I can say so, is that by structuring this in a single

fund, right? So for example, if you have one of our return stack DTFs, where you give us a dollar and we give you a dollar of U S equity plus a dollar of managed futures, what the line item return that a client sees in their portfolio is a combination of those two things, right? A combination of stocks plus a combination of managed futures. And hopefully if those are uncorrelated, the return of that line item is going to be a little bit smoother and again a little bit easier for the client to hold for the long run. It's a classic one plus one is not two like these two things put them together they do better things right the volatility could be lower the drawdown could be lower. Yeah I mean the simple the simple math is if they are truly uncorrelated and you have a unit of volatility coming from

stocks and a unit of volatility coming from whatever you stack on top and they're uncorrelated and you have a unit of volatility coming from stocks and a unit of volatility coming from whatever you stack on top and they're uncorrelated, the volatility of the new package is not two, it's 1.4. Right. But I'm saying like if I'm looking at what you, to your point, if those are two line items, I don't see that 1.4. I see the two different volatilities and that's what drives me crazy. So now you've just created the The one plus the one on your statement doesn't equal 1.4 because you get blinded by it. So now it's just throw one and two out You're just viewing the 1.4 on your statement. Exactly Love it for lack of better phrase a spoonful of sugar helps the medicine go down. Hopefully can you sing it? Do you think like the whole terms I talk about advisors, Oh, is this

going my stock replacement or my bond replacement, right? Is that just kind of people got to that place because they had to think about it like that? I didn't want to stow down myself. So I'm calling something stock replacement, bond replacement. Yeah. I think asking whether something was stock replacement or bond replacement goes right to the heart of the problem, which was adding a diversifier required subtracting

something. Yeah. Right? I don't want to subtract. I want to replace. Right. And so the question was, if you're getting rid of those stocks and bonds and you're adding this diversifier, is the diversifier more likely to act like stocks?

Is it more likely to be defensive like bonds? What's the volatility profile? What's your expected return estimate? Frankly, things like long, short equity strategies maybe became less attractive because the hurdle rate of trying to beat stocks or bonds was simply too high. And so this framework of right again, going from a 60-40 to say a 50-30-20, where you have a 20% sleeve of alternatives, is where a lot of advisors have tried to migrate and have struggled both in making the returns line up as well as getting clients to stick with it behaviorally. What we're proposing is going from a 60-40 to a 60-40-20, right, sort of at the extreme

of an overlay. And again, the idea there being things like long short equity, you don't have to make the question, you don't have to answer the question, is this a stock replacement? Is it a bond replacement? It's simply the question of, do I think this is going to be additive to my portfolio, both in terms of its diversification benefits and its return benefits over the long run? It's so modern society, like, oh, should I read this podcast or watch this show or read this? No, just do it all at the same time. Right. Right.

We've just gone to that place and everywhere in society. It's that meme like working on those dose. Like, why not both? Why do you have to choose? We didn't know we're going to get some Spanish on here. So let's dive into our SBA. What's it stand for? It's a little bit different than the others, but give us give us the goods. RSBA is our most recently launched fund launched in December 2024. It stands for the return

stacked bonds and merger arbitrage strategy. So the core concept here is for every dollar you invest in this fund, you're going to get a dollar of broad US Treasury exposure plus a dollar invested in a merger arbitrage strategy. I asked Mike Filbrick about this, but why is bonds dead? Are bonds dead? Is bonds dead? I just learned English yesterday. Are bonds dead? I just learned English yesterday. Are bonds dead? I think bonds are arguably potentially more attractive today than they've been in a long time. So one of the things, I'm going to use rules here with an air quote for anyone listening. It's not a strict rule, but it's a good practical estimate is that your starting yield of your bond portfolio is a great predictor of returns over a period of time equal to twice the duration of your portfolio minus one. It's a mouthful but

let's say right you're looking at intermediate term treasuries with a yield of 5% and a duration of 7. Two times that duration is 14 minus 1 is 13. If I buy intermediate term treasuries today, right, in a portfolio, so seven to 10 year that's constantly rolling over in that seven to 10 year period, I pretty much know regardless of what happens with interest rates, my nominal annualized return is gonna be about 5% over the next 13 years.

Right, so you rewind the clock and say, okay, go to something like Ag or go to something like Core Intermediate Term Treasuries two, three years ago. Right? Coming out of COVID, you were talking about a 1% annualized return over the next 15 years. Now you're talking about a four and a half, 5% annualized return. And again, it's nominal. So we've got to be a little bit careful about how we're thinking about what the inflation risks are and whether we're being compensated fairly for that. But on a pure nominal basis, being able to walk in for that intermediate term money, I think what's particularly interesting is like, we have a really strong estimate of what that base is going to give us. Right? And so one of the things we've been talking a lot about

is, okay, if I'm looking at that intermediate term, 10 to 15 year period, where you typically maybe buy stocks, is there a better opportunity in buying bonds and stacking a set of alternatives on top? Because we're pretty confident bonds can get us that four and a half, 5% nominal annualized return over that period. Again, regardless of where interest rates go, it all sort of averages out over that period. That's that's how the rule works. And then it's just a question of can I find interesting alternative strategies that are hopefully uncorrelated that can add to 300 basis points on top? And then you're talking about a total return in the realm of six to eight percent. And I think that's where a lot of people

would be quite happy. Yeah. Just for your knowledge, you had all that math and everything and Mike just said, no, bonds aren't dead. So you led the witness, you're the witness. I'm leading now the witness after you led me. That alternative in this case is merger arbitrage. So how, why merger arbitrage? It seems a little outside of what you guys normally do, but so talk

a little bit about that of why it isn't and why it's cool. Yeah, when we think of interesting alternative strategies, one of the things I really like to lean into our strategies where I have a strong conviction I'm getting paid for a risk that I'm bearing. Right. So when I think about these return sources, there's typically two. There's what we call a risk premium, right, where you're bearing risk and earning a reward. Buying stocks, buying bonds, you're in theory earning a risk premium. You're bearing risk, you get the reward over the long run. Versus there's other strategies where you're taking advantage of the behavior of other investors in the market and those things can get crowded out, the alpha can decay over time. Whereas I think risk premia, there's a good foundational argument as to why you should earn it. And so merger arbitrage is a strategy to me that fits in the risk premium bucket. The way a merger arbitrage strategy works

is that when a deal is publicly announced, the company that is getting acquired typically jumps up in price, but it doesn't jump up fully to the price, the announced price of which it's getting acquired. It jumps partway there. And the remaining difference between where the price goes to and where the buyout price would actually

be is a spread. And the size of that spread is going to be based on the market's perception of how long it's going to take for the deal to get closed and whether the deal is actually going to get closed. Right. So there's a little bit of a likely item. There's a little bit of a time premium there. And there's a little bit of a pro lack of a better phrase, a credit premium. All right. What's, what What's the risk that regulators intervene or something else knocks this deal out from being able to be accomplished? And so by buying into the deals at that point, you are hopefully earning a risk premium holding those deals to near completion. And historically what we find is if you look at over the last 20, 25 years of a sort of a globally diversified merger arbitrage strategy, just the core beta of this strategy,

it tends to earn between 200 to 300 basis points of excess returns above cash. And that's an interesting, I've never thought of that. So is it just the time value of money is part of that premium? Like yeah how long that you write it's if it's worth X at 12 months from now it's only worth Y today because of them. Yeah and so there right you're not earning anything above sort of the risk-free rate if it's known right if the market truly feels that this deal is a hundred percent likely to get completed the return you're gonna earn is equal to just the risk-free rate. And so it's not particularly compelling because there's no risk in it. You need to find the deals that have enough risk in them that there's a bit of a risk

premium to be squeezed. And if you're taking a more active approach, ideally, what you're doing is identifying deals that you think of a higher likelihood of being completed than the market is pricing in. And so you think there's a bit of a mispricing that you can take advantage of. And how is it, what's the correlation look like with, I guess it's with bonds. I'm saying with equity markets must be pretty highly correlated, right? You need kind of a rising tide for deals to get done, all that jazz. So what do you think of the correlations with stocks and then with bonds? Yeah, the general presumption is that merger arbitrage is a pro-cyclical strategy akin to credit. And what you do find is there is when you isolate the excess return of merger arbitrage strategies,

there is a little bit of correlation to stocks. There's also a little bit of correlation to credit, sort of like a 0.5 correlation to the credit risk premium. But what you find, at least historically, is that the drawdown profile of merger arbitrage is very different than the drawdown profile of credit during equity sell-offs. And that's because credit tends to be this very economically pro-cyclical concept, right? When the market's falling apart, it's typically because the economy is struggling, and so there's an increased likelihood of credit defaults, just sort of generically across the board. It is very hard for a publicly announced merger to fall apart unless regulators intervene. It might take longer than expected, but usually what you're talking about is a basket of

truly idiosyncratic risks. There's a lot less sort of just generic beta exposure in there. Yeah, like the CEO left or didn't want the family's blocking the deal, something like that. Right. But the one I always bring up is this thing about Elon Musk and buying Twitter. Yeah. He publicly announced he was going to do it and he tried to get out of it. And the case law around this is so substantial. He was forced to buy the company. Right.

He didn't want it. Now, rewrite history and say he did, but he didn't want it. And he was forced to do it because the case law around it is so strong. That's a whole nother podcast of what path that's led our country down. But we'll leave that be for a second. We'll leave it. We'll definitely leave that be. So that's all to say there are, that's, you know, you can still see some liquidity shocks in merger ARB during equity sell-offs, but they tend

to be far, far, far less substantial than you get with credit. And then as you can expect, because merger ARB has a correlation of about 0.5 to credit, has a low correlation to equities, its correlation to bonds is also quite low, if not tilting towards negative historically, because it has that sort of credit-like component to it. And so to me, the way I really think about this, to bring this back around to bonds plus merger ARB, is corporate bonds are just treasuries plus credit risk. I look at this as treasuries plus merger ARB risk, which is different, uncorrelated,

and historically had a excess return very similar to credit. So anyone who owns corporate bonds, I think this is a really compelling alternative and diversifier to corporate bonds, particularly in an environment like today where credit spreads are so incredibly thin. From investment grade to junk or even from treasuries to high yield. Uh, investment and looking at treasuries to investment grade.

I mean, actually across the board, high yield spreads are very thin, investment grade, very thin, but when I'm talking about replacing corporate bonds, I'm thinking really more about investment grade corporates. And then talk real quick about the arbitrage of it, right? So you, it's not, you mentioned if there's a big stock market sell, if you're not losing the whole position, right? You're just losing your, the premium, if the deal didn't go wrong.

Yeah, so typically the way this stuff works, right, is there's the pre-announcement price, there's the takeout price, and there's the price it's trading at. And you're trying to capture the difference between the price it's trading at and the price it's gonna get bought out at over time, and that's the deal spread.

If the deal falls apart, it typically falls back down to an adjusted pre-announcement price. And that adjustment happens with what's happened in the market over time. Right? So if the market's gone up over time, actually the deal might be less risky. Right? If the market's gone up, it might have lower to fall. If the market's gone down, the deal might actually get riskier because it has further to fall in that

period. So there are some adjustments that are made in our process to the weightings of each deal to account for that. As the deal gets riskier or less risky, we will adjust the weights to account for that. But what's happening in the market does change the riskiness of any individual deal. But what's the actual trade look like you're buying the acquirer acquiring company and selling the acquirer. So it depends on the structure of the deal. So if the deal is an

all cash deal, all we're going to do is buy the company that is getting acquired. If it's a cash plus equity deal, we're going to buy the company that's getting acquired and then short the appropriate amount of the acquirer to cancel out the equity component of the deal. Yeah. But in that former case, you just have that long equity risk. Yeah. And the vast majority of deals are more cash-based than equity-based right now.

So tip, the portfolio will typically look much more like just buying a basket along only equities. But unlike a basket along only equities, after these deals are announced, their volatility drops substantially, right? You're not talking about if you're 100% invested in a basket of 1520 deals, you're not talking about a concentrated equity portfolio type volatility. These stocks once they're announced tend to trade at a very low volatility profile until the deal potentially breaks. And that's where you see volatility. Because they have a ceiling, right? It's almost like you've reduced a bunch of the options. I'm going to rephrase it. It's credit or it's treasuries plus deal risk instead of credit risk. I think that's right.

Yeah. So real quick, as we're trying to do these quick, how do you think about everyone knows that this beta exists? Everyone knows that this merger arbitrage, there's billions of dollars trying to do it at the same time. Does that lessen the opportunity or there's enough to go around? How do you think about that?

Everyone knows the equity risk premium exists. Everyone knows the bond risk premium exists. Does that remove the equity risk premium?. Everyone knows the bond risk premium exists. Does that remove the equity risk premium? No, at the end of the day, we expect to be compensated for the risk we bear in this situation. That isn't to say you can't have crowding. You can look at bubbles in different asset classes that exist where you are being probably less compensated than you should be for the risk you're bearing. There can be crowding and merger arbitrage, but we haven't seen that.

We've seen that what happens is people who are in these stocks pre-announcement, they tend to want to sell post-announcement because there's not a lot of juice left to squeeze that can push it down. You are indeed taking on idiosyncratic deal risk and there's an expectation you should be compensated for that. And you can explicitly measure how much juice there is to squeeze in each deal, right? If I tell you this deal is going to get done at the end of the year and the amount of spread left is equal exactly to the time value of money discounting using the treasury rate, I'm not going to bother entering that deal, right? So it's not hard to filter out those deals that aren't attractive

from an actual return potential perspective. And there's people on the other side, too, right? So there's, right, you can be trading against them. So wrap this up, the pieces together, how should I think about the risk and return profile? Yeah. So when I look at this strategy, again, I think the best comp is an investment grade corporate bond fund. The two best ways to use this strategy, in my opinion, is you are selling corporate bonds to buy this strategy. And you're doing that because you want to either diversify your corporate bond exposure in general, or you think today is

particularly, you're no longer being compensated from a credit spread perspective for the risk you're taking in corporate bonds. The other way to think about this is, again, you are stacking another return stream. And so if you have treasury exposure and you want to pursue excess returns in your portfolio at the aggregate level, is it going to be easier to find a manager who delivers alpha in stocks or should you just buy the S&P and then take some of your treasuries and stack merger Arbondtrop and use that merger strategy as your active risk budget? And that latter approach is much more akin akin to the idea portable alpha that institutions have been using forever and saying well you

know why why play the game on hard mode with security selection when I think there's this active risk premium that I can be paid for that I've higher conviction in I just need to figure out how to get it into my portfolio and this packaging bonds plus merger ARB is one way of doing that. Well then a few of your other guys couldn't answer this very well. All these new alternative income funds that are basically selling options against holdings like compare and contrast kind of the stacking concept with that alternative income concept. Yeah it depends on the alternative income. Yeah, I'm looking at thousands of different strategies together.

There's a lot of different strategies here, right? But at the end of the day, you can think of those alternative income funds as buying the underlying and stacking, I'll use the simplest form, a sold call on top, right? And so you can isolate those two return streams and think of it as just being a long, long, the underlying stock or some underlying index, you know, and short this other income. I don't like the, personally, I don't like the idea of calling it selling for any name. Right. I think that's a, that's a misnomer and, and, um, takes advantage of investor ignorance, right? But you can isolate the profile of that thing you're stacking on top. Does it make sense to continue selling implied of all?

Is that an attractive return stream on top of a long equity position? Maybe, maybe not, but I think there's people who might argue and have written academically. If you take bonds and sell vol on top of that, it's actually a way to synthetically create investment grade corporates. So again, it all depends on how you're doing it. It is a form of stacking when you think about the two separate pieces, but I'm not particularly a fan of it or how it's being positioned in the market. But to me, it's by definition caps your upside on the one piece where the return

stagnant, nothing's capped. You're just putting them together instead of like kind of borrowing from tomorrow so to speak. Yeah, I mean you could go look at some fall selling index and say I just want to stack that index on top of some equity data and you know whether it's capped or not for what the underlying is you're just stacking these return streams together it just happens to be they have a negative correlation when to the upside right right they're conditional on each other so the very simple way is very large pensions

yes it is a form of stacking I It is a form of stacking. I don't particularly... We haven't launched anything in that category because I am not a fan of how they're structured. We'll end with some fun here. Choose your fighter, Mortal Kombat style. You can select yourself if you're so inclined. So we'll start with choose your fighter to join you in a math bowl science fair to win a math bowl science fair. Yeah, I'm going to go with and you mean for the products we're talking about, right? No, no, no.

Between you, Adam, Mike and Rod. Oh, this is fun. This is fun. Yeah. I'm going to choose probably Adam. Okay, Adam. Is he with me or is he replacing me? No, you're you can be out of the team, you got to select one to go compete and

win. All right, I'll choose Adam for that. Nice. Nice. Um, choose your fighter for a beauty contest. Yeah, I'll choose myself. Yeah, I'll choose myself. I see where you're going. You're trying to get one for everyone. Choose your fighter for actual combat, not video game combat, like a bar fight or something of that nature. Mike Filbrick.

100%. The luck, 100% luck. And then finally, choose your fighter for leading the four of you in a kind of k-pop dance routine. Rodrigo. I mean that fits perfectly. Hey you nailed it. And in my brain I actually had that kind of those four in that order. Now what I want to know is did anyone say anything different than that? That's what I'm gonna listen in for. Yeah, you got a few

you got a few math bowl science fair wins plus a Winning a fight, too They've never seen me fight clearly. Yeah, they see your your vids and like man crush the dad by All right, thank you Corey any last thoughts Keep stacking no keep stacking Alright, thank you Corey. Any last thoughts? Keep stacking. Keep stacking. I'm just waiting for you guys to be at a conference with like a tent full of pancake stacks just everywhere. Just eat as many stacks as you want.

Yeah, well we at one of the last conferences we had a large Jenga tower and then we realized that we might have... It falls down and... It falls down. We might miss a misplay that one needs to be like vice versa like no matter what you do to this Jenga it will always exactly exactly Jeff really appreciate the opportunity there you have it four different return stacking combos stacked into one pod that was fun and speaking of fun the results are in and have been tabulated for our choose your fighter game we had a tie for math and science between Cory and

Adam, a clean sweep of the beauty contest by Cory. I'm gonna have to check that. Three of four picking Mike in a bar fight. Definitely on board with that. And three of four picking Rodrigo to lead the dance routine. Never seen that so can't comment. But if only we could get them to go do these things that would be a lot of fun. That's it for the pod. Thanks to Adam. Thanks to Mike. Thanks to Rod. Thanks to Cory. Thanks to Jeff Berger for producing. What was a bit more work this week stitching all that together. Thanks to RCM for sponsoring. We'll be off the next week maybe two spring breaks and all, but back after that. Peace.

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