Enter the New World of Return Stacking - Inaugural Episode!


This podcast episode serves as a comprehensive introduction to Return Stacking and provides valuable insights for investors looking to navigate the complexities of modern markets with innovative strategies.

Key Topics

Return Stacking, Capital Efficiency, Diversified Alternatives

Welcome to the inaugural episode of the Get Stacked Investment Podcast. This episode brings together Corey Hoffstein, Rodrigo Gordillo, Mike Philbrick, and Adam Butler to dive deep into the concepts of Return Stacking, market efficiency, and investment strategies beyond traditional stock picking. Providing insights into Return Stacking's relevance in today's investment landscape, the importance of structured diversification to enhance portfolio sustainability and its potential to create excess returns with more confidence than traditional stock picking.


In this episode, Corey Hoffstein from Newfound Research, and Rodrigo Gordillo and Adam Butler of Resolve Asset Management Global, discuss the concept of return stacking and its implications for investors. They delve into the challenges of beating the large cap U.S. equities market, the shift in conversations about return stacking from risk management to creating excess returns, and the potential of diversification in generating consistent positive excess returns.

Topics Discussed

  • The difficulties of beating the large cap U.S. equities market and the need for diversification
  • The shift in conversations about return stacking from risk management to creating excess returns
  • The potential of diversification in generating consistent positive excess returns
  • The idea of dictum in the markets and the difference between behavioral time and statistical time
  • The concept of risk parity and the importance of maintaining balance in portfolio risk
  • The role of trend following in risk management and return stacking
  • The potential of stacking strategies in enhancing portfolio returns
  • The structural challenges in implementing return stacked strategies in portfolios
  • The importance of diversification in ensuring investment success

This episode provides valuable insights into the concept of return stacking and its potential in enhancing portfolio returns. It is a must-listen for investors interested in diversification strategies and the future of investment management.

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In the highly efficient large cap U.S. equities market, conventional investment strategies like stock picking are proving insufficient for generating positive excess returns. It’s increasingly necessary to pivot from traditional long-only strategies, as these markets are difficult to outperform, especially within public mutual funds or ETFs. A shift towards more novel approaches like unshackling risk budgets and exploring alternatives is paramount. It’s not enough anymore to just manage risk; investors are now seeking strategies to generate excess returns. This can be achieved by embracing return stacking and diversification, wherein different asset classes are combined to create more robust portfolios. Return stacking has evolved from being a tool for managing equity and bond risks, to a strategy for generating excess returns. Currently, investors are showing an interest in stacking assets like Bitcoin, ETH, and NVIDIA on top of traditional portfolios such as the S&P 500. However, active management isn’t without its challenges. There are risks associated with putting a large portion of the portfolio in a few top-weighted stocks. To overcome these challenges, alternative strategies that consistently generate positive excess returns are being sought. Implementing strategies that are all-weather and all-terrain can help navigate market exuberance and deliver more stable returns. Diversification remains a crucial strategy in portfolio management. All-weather portfolios, which perform well under various market conditions, are essential for sustainable returns. The conversation also examines return stacking as a means to combine different asset classes for excess returns. The concept of tracking portfolios to a certain percentage of the S&P index is introduced. Understanding the correlation of assets when stacked is also important because it’s the combination that determines the volatility, not the individual parts. Trend following is presented as a valuable strategy to generate excess returns in different market regimes. It also helps in capturing risk premiums and providing diversification. Similarly, risk parity is emphasized for providing diversity and stability. It involves allocating risks across different asset classes and managing them under various market conditions. The stacking of different assets such as commodities can enhance risk parity and offer a hedge for inflation, potentially improving returns. In the end, a balanced risk approach is key. One must be prepared for different inflation and growth scenarios and understand how different asset classes react to these scenarios. The inclusion of a trend following component can help in capturing returns during market shifts and mitigating regret. The need for alternative strategies is apparent, with attention shifting towards return stack strategies. It’s crucial for advisors and allocators to embrace these strategies, understand them, and educate others about them. In conclusion, the path to achieving consistent excess returns involves a paradigm shift from traditional investment strategies. Diversification, alternative strategies, return stacking, trend following and risk parity are the key elements of this new approach. Adapting to these new strategies is not without its obstacles, but education and awareness play a crucial role in facilitating this transition.

Topic Summaries

1. Challenges of beating the efficient large cap U.S. equities market

Beating the efficient large cap U.S. equities market is a challenging task. The evidence suggests that it is a hard market to outperform, especially in public mutual funds or ETFs. Many investors are willing to allocate to this market, further highlighting its efficiency. The conversation emphasizes the need to find alternative strategies that can generate positive excess returns. Corey Hoffstein points out that stock picking in this market is particularly difficult, and it is more beneficial to unshackle the risk budget from the long-only concept and explore other options. The discussion also touches upon the idea that monopolistic rents are being attacked, potentially signaling a shift in the market. However, the difficulty of being an active manager is highlighted, with statistics showing the challenges faced by active managers. Overall, the conversation underscores the importance of recognizing the efficiency of large cap U.S. equities and the need to explore alternative strategies to generate positive excess returns.

2. The shift in focus from risk management to generating excess returns

The conversation explores the transition in investment strategies from focusing on risk management to generating excess returns. Investors are realizing that large cap U.S. equities are efficient and difficult to beat, so they are looking for alternative strategies to generate positive excess returns. The participants discuss the idea of unshackling risk budgets from the traditional long-only concept and exploring other options. They emphasize the importance of finding strategies that can consistently generate positive excess returns, rather than relying solely on stock picking. The shift in focus is driven by the desire to maximize returns and take advantage of opportunities in the market. This transition is seen as a way to create a more sustainable portfolio and avoid performance chasing. The participants highlight the importance of return stacking and diversification as key components of generating excess returns. Overall, the conversation highlights the changing mindset in the investment space, where risk management is taking a back seat to the pursuit of higher returns through alternative strategies.

3. The changing conversations around return stacking

The conversations around return stacking have been evolving over the years. In 2022, the focus was on using return stacking to create all-weather portfolios that could manage equity and bond risks. However, in 2023, the conversation shifted towards using return stacking to generate excess returns. This change in focus reflects the changing market conditions and investor preferences. The participants discuss how investors are now more interested in stacking assets like Bitcoin, ETH, and NVIDIA on top of the S&P 500 or other traditional portfolios. They believe that stocks and bonds are over-owned and that alternative assets are being overlooked. The participants also highlight the importance of considering the correlation between assets when stacking them. They note that simply stacking assets with a 10% vol may not accurately reflect the overall volatility of the portfolio. Instead, the volatility of the stack should be assessed by looking at the combination of assets as a whole. Overall, the discussion emphasizes the shift in conversations around return stacking, from risk management to creating excess returns, and the growing interest in alternative assets.

4. The appeal of return stacking and the desire for high confidence strategies

Investors are increasingly drawn to the concept of return stacking and the desire for high confidence strategies that can consistently generate positive excess returns. Traditional stock picking in large cap U.S. equities is seen as a challenging market to beat, especially in public mutual funds or ETFs. As a result, investors are looking to unshackle their risk budgets from the long-only concept and explore alternative strategies. The participants discuss the need to allocate risk budgets to other areas that have a higher potential for generating positive excess returns. They emphasize the limitations of stock picking and the appeal of return stacking as a way to create excess returns. The conversation has shifted from using return stacking to plug the risk holes in a portfolio to using it as a means of generating consistent excess returns. The participants express confidence in finding other avenues for generating positive returns and suggest that there are many options to explore beyond stock picking. Overall, the discussion highlights the growing interest in return stacking and the desire for strategies that can provide high confidence and consistent excess returns.

5. The challenges and limitations of active management in a market dominated by top-weighted stocks

Active management faces challenges in making active bets, especially in a market dominated by a few top-weighted stocks. The conversation highlights the difficulty for long-only managers to have active bets without underweighting or overweighting these top names. This poses career risk as managers may end up with a significant portion of their portfolio in these few stocks. The participants discuss the limitations of stock picking and the need to unshackle risk budgets from the long-only concept. They suggest exploring other strategies that can generate positive excess returns on a more consistent basis. The conversation also touches on the importance of considering all-weather and all-terrain strategies, even though they may not be popular during times of market exuberance. Overall, the discussion emphasizes the challenges and limitations of active management in a market environment where large-cap U.S. equities are highly efficient and top-weighted stocks dominate.

6. The benefits of diversification and the importance of all-weather portfolios

Diversification is a key strategy in portfolio management, and all-weather portfolios are crucial for achieving sustainable returns. The participants discuss the importance of including diversifiers in portfolios to make them more sustainable and avoid performance chasing. They emphasize the need to manage equity and bond risks and create portfolios that can perform well in different market conditions. The participants also highlight the role of risk parity in diversification, where the risk of each asset is held relatively in balance in the portfolio. They mention the concept of tracking and how portfolios can be designed to track a certain percentage of the S&P Index. Model portfolios are suggested as a helpful tool for providing intuition and insight into portfolio construction. The discussion also touches on the idea of return stacking, where excess returns can be created by combining different asset classes. The participants argue that more diversification is typically better for achieving greater certainty in outcomes. They discuss the benefits of all-weather portfolios and how they can provide diversification without sacrificing returns. The conversation concludes by highlighting the structural reasons that prevent some portfolios from adopting these strategies and compares it to the healthcare industry’s slow adoption of new treatments. Overall, the discussion emphasizes the benefits of diversification and the importance of all-weather portfolios in achieving sustainable and successful investment outcomes.

7. The role of trend following and the potential for excess returns

Trend following is discussed as a strategy to generate excess returns in different market regimes. The participants highlight the importance of analyzing historical data and using trend following to create a diversified portfolio. They mention the risk parity concept, which involves leveraging equities, bonds, and commodities to capture risk premiums. Adding a trend following component to the portfolio is seen as the ‘magic’ that can enhance returns. The conversation also touches on the role of trend following in mitigating regret and adapting to changing investor expectations. Overall, trend following is presented as a strategy that can provide diversification, capture risk premiums, and generate consistent returns.

8. The importance of risk parity and the need for balanced risk exposure in portfolio management

Risk parity and balanced risk exposure are crucial elements in portfolio management. The participants emphasize the significance of risk parity in providing diversity and stability in returns. They discuss the concept of risk parity and its ability to allocate risk across different asset classes and manage risk in various market conditions. They highlight the importance of unshackling the risk budget from the traditional long-only concept and exploring other avenues for generating positive excess returns. They argue that large-cap U.S. equities are highly efficient and difficult to beat, making it necessary to look for alternative strategies. One such strategy is trend following, which offers asymmetry in returns and can help alleviate regret caused by unexpected market shifts. The discussion also touches on the idea of stacking different assets to enhance risk parity. By adding commodities and a trend component to the portfolio, investors can achieve a zero-cost hedge for inflation and potentially improve returns. The participants stress the need for a balanced risk approach, where risk is allocated across different asset classes and managed based on expected risk premiums. They argue that diversification is key to achieving greater certainty in investment outcomes and reducing reliance on a single asset class. Overall, the conversation highlights the importance of risk parity and balanced risk exposure in portfolio management, emphasizing the need to explore alternative strategies and diversify risk across different assets.

9. The challenges of risk parity and the impact of market shifts on portfolio performance

The challenges of risk parity and the impact of market shifts on portfolio performance are explored in this conversation. The participants discuss the need to analyze different inflation and growth scenarios and how different asset classes react in those scenarios. They emphasize the importance of trend following in mitigating risk and capturing returns during market shifts. One participant mentions that risk parity can suffer when two asset classes decline while one rises, highlighting the need for a trend following component. This component helps to alleviate regret by reducing exposure to abandoned regimes and reallocating capital to appreciating prices. The concept of risk parity is praised for its ability to count on the risk premium of equities and bonds, and the addition of commodities as a zero-cost hedge for inflation. The inclusion of a trend following component is seen as the ‘magic’ that enhances risk parity. The speakers will further explore these ideas and their implications for portfolio management.

10. The need for alternative strategies and the underappreciation of return stacked strategies

The need for alternative strategies and the underappreciation of return stacked strategies is a key theme. The participants highlight the overconfidence in equities and bonds and the lack of attention given to alternative strategies. They argue that large-cap U.S. equities are efficient and difficult to beat, making it important to explore other avenues for generating positive excess returns. They emphasize the importance of unshackling risk budgets from traditional long-only concepts and focusing on return stacking. Return stacking is seen as a way to create excess returns with higher confidence, compared to security selection. The conversation shifts from using return stacking to plug risk holes in portfolios, to using it to create excess returns. The participants discuss the challenges faced by active managers in a top-weighted market and the difficulty of making active bets without under-weighting top names. They also explore the concept of risk parity and the benefits of adding trend following and carry strategies to portfolios. The participants express their preference for alternative strategies like trend and carry over traditional stocks and bonds, highlighting the need for greater attention to be paid to these alternatives.

11. The importance of education and awareness in adopting alternative strategies

Education and awareness play a crucial role in adopting alternative strategies for portfolio performance. The conversation highlights the need for advisors and allocators to understand and embrace these strategies. The participants emphasize the value of model portfolios in providing insight and intuition. They stress the importance of educating people to ensure success comes from a diversified approach, rather than relying on a single market. They encourage practitioners to explore alternative strategies and evaluate their potential. The conversation also touches on the structural reasons that hinder the adoption of these strategies, such as the influence of gatekeepers in the industry. Overall, the discussion underscores the significance of education and awareness in incorporating alternative strategies into investment portfolios.


[00:00:00]Corey Hoffstein: I know that most investors are constrained, but we go back to, why do people keep trying to fish in the same over-fished pond? All the evidence suggests that large cap U.S. equities in particular, are pretty darn efficient. It’s a very hard market to beat, especially in a public mutual fund or an ETF. If you can unshackle your risk budget from this long-only concept and just say, let me just get the beta, and let me stack something else. What do we have more confidence in, generating positive excess returns on a more consistent basis than stock picking, and I think there’s a whole lot of things that I would rather spend my active risk budget on.

[00:00:40]Rodrigo Gordillo: Yeah. If you care about beating the index, you can try as hard as you can, competing for that money against other stock pickers, or you can simply just think about macro inefficiencies and use that to your advantage, and I don’t think anybody’s using that to their advantage.

​Return Stacking

[00:00:59]Rodrigo Gordillo: Hello everybody, and welcome to the first and inaugural episode of the Return Stacking podcast. This is something that we’re going to hopefully try to do once a month going forward, where we’re going to talk about all things, Return Stacking, the different elements that one could use in the Return Stacking space, and how they’re interacting with the markets today and that the individual players, how they feel about it.

So we’re going to try to expound as much as we can every month on what we’ve learned, conversations we’ve had, and maybe some of the pieces that we’ve written on the ReturnStacked.com website. So with that, today I am joined by, Corey Hoffstein, CIO of Newfound Research. We have Michael Philbrick, CEO, we also have Adam Butler, CIO, and myself, President of ReSolve Asset Management Global.

I think there’s plenty to talk about. Corey, you were saying that there’s some interesting discussions being had in the investment space with regards to Return Stacking, especially the transition of how people felt in 2022 versus 2023, and now 2024. Why don’t you tell us a little bit of the conversations you’ve been having.

[00:02:01]Corey Hoffstein: When we co-authored the paper back in 2021, the original Return Stacking paper, a lot of what we were focused on with the Return Stacking concept was, how do we introduce alternatives as a diversifier, while allowing people to keep their core stocks and bonds that they wanted, allowing these diversifiers to be in the portfolio from a structural perspective, hopefully allowing people to make them more sustainable so that when they needed them, they were actually there, rather than doing this performance chasing?

That’s all too evident in the space. 2022 then rolls around, and I don’t think we, in any of our careers, we have had a better timed paper for precisely what we were talking about. But 2022 seems to be squarely in, out of the rear view mirror. We’re well past that at this point. 2023 was such a strong market. I think we have bullish fever at the moment, that the conversation for me with a lot of the Return Stacking ideas has gone from, how do I use Return Stacking to plug the risk holes in my portfolio, to how do I use Return Stacking to create excess returns I have higher confidence in, versus security selection.

And it is, what’s funny is, it can be the exact same thing, right? You could just stack, for example, managed futures on top, and it’s the answer to both, but the shape of the conversation, what people are looking for has drastically…

[00:03:23]Rodrigo Gordillo: It’s just been so funny, because I’ve noticed that the conversations in 2022 were about how do I use Return Stacking, or at least there were significantly more conversations about how do I use Return Stacking to create an all weather, all-terrain portfolio, right, where I actually don’t want any equity risk or bond risk. I want to manage that with whatever stacks are going to do to – that thing, I don’t care about that anymore. How do we get the S&P 500 plus, or like 80/20 plus, or 60/40 plus, less 60/40, more 80/20, a lot of S&P 500 plus, conversations.

[00:03:57]Adam Butler: I think people, what they want right now is for us to stack Bitcoin on ETH on NVIDIA. If we could deliver that product, I…

[00:04:06]Mike Philbrick: Yes. I’m a yes there. When do you want to do it?

[00:04:09]Rodrigo Gordillo: But it’s true. It’s just amazing to see the animal spirits shift around.

[00:04:13]Mike Philbrick: I think the conversations I’ve had anyway, have centered around the fact that while things are expensive, they’re not as expensive as they’ve ever been in the U.S., certainly not as expensive as they got in Japan. And the ferocity of the FOMO as you climb that curve intensifies dramatically. And I think we’re seeing part of that, but it’s possible that we haven’t seen anything yet, and that this right tail risk is truly, the potential issue as advisors who are trying to take a more sort of risk averse course, I’ll call it, maybe adopting more tracking error, are going to feel more pain. Lots more pain. And trying to hedge that potential outcome, and understanding history and a little bit of market history is, you get the best of both worlds when you’re Return Stacking because you do have your diversifiers in there, and hopefully they will fire at some point, to offset some of the potential drawdowns happening in the betas. But you are participating all along the way. Go ahead.

[00:05:26]Rodrigo Gordillo: That’s the other thing that has popped up in our conversations in the last 12 months, is that you see the big exposures in the markets and the S&P 500 to the five stocks that have moved it, and very few advisors are fully exposed to those things, because they’re smart. They’re being prudent, and a lot of them are sitting in a lot of cash and have, and we’re sitting in cash throughout the second half of 2022, and throughout 2023. And so I think that FOMO, not just from the investors themselves, but I think the clients clamoring for, how did we miss this? It’s an interesting use case that we should do an analysis of, what does better, a 30% cash buffer or an uncorrelated stack for the outcome of the ultimate investor.

[00:06:14]Corey Hoffstein: Yeah, what, like you pointed out that most people don’t actually even have the market weight to the magnificent seven, and I think what people don’t realize is when the market becomes so top-weighted, and I’m not making an argument here as to whether that’s right or wrong, or whether there’s, it’s a bubble or not, but when it becomes so top-weighted, it is very difficult for long-only managers to have active bets without underweighting those top names, right?

So think about what happens if a manager is bullish those top names, and those top names are already 30% of the S&P. Now they’re going to have 50 percent of their portfolio in those seven names. That’s a lot of career risk, but if you just market weight them, if you want to be neutral to those names, that eats up 30% of your portfolio as an active manager, right?

And so the reality is many of these active stock picking managers, because they don’t have the ability to short, by being long-only, end up having to underweight those names to free up capital to put in names that they like. And so a lot of people just end up not even having market weight, just by the constraints of long-only. And so you end up underweight these names and chasing returns.

[00:07:26]Mike Philbrick: We were talking to Jack Shannon at Morningstar about this, about …diversified versus non-diversified funds and the 75-5-10 rule, where if you’re not tracking the index, you can’t actually get there with the large holdings, in the top seven holdings. You can’t track it. There’s a structural impediment for active management, active managers, to actually achieve even getting an overweight bet on the things that are working the most, if you will.

[00:07:58]Corey Hoffstein: That’s a really good point, Mike. And I bet most people who are listening aren’t even aware of those rules, that there are constraints as to how much a manager can actually put in a single name.

[00:08:07]Rodrigo Gordillo: Let alone overweight them from whatever the index has them. Like, how many active managers are getting the massive overweight, natural overweight that exists in the index already and saying, let’s add five more percent to that. Just no, you’re taking the other side for sure.

[00:08:21]Adam Butler: A thing that we also talked about is just how large and confident of you, you must have on the sustained outperformance of those names in order to hold them in such high concentration of portfolio, right, if you’re an active manager and you’re charged with having active views on a portfolio, right?

I’ll, each time you take an active view, it’s a trade-off between, is the excess return I’m hoping to get going to overcome the excess risk that I’m taking. And so that’s what sort of prevents diversified portfolios from becoming too overly concentrated. The magnitude of different unexpected returns between the mag seven and all of the other stocks, given their concentration in the index. There’s no conceivable way that an active manager could possibly be that confident, in order to make that level of active bet. The passive market is making a bet on those stocks that no reasonable active manager could ever take.

[00:09:31]Rodrigo Gordillo: Yeah, indexing continues to be show over, time and time again.

[00:09:36]Adam Butler: Hit me Cory hit me. I see you rolling. You’re grinding on that.

[00:09:40]Corey Hoffstein: I’m thinking through what you’re saying. I, and I’m not sure I a hundred percent agree with it, but it might just be that I’m not fully grasping what you’re saying. I think if you said, all right, here’s the 500 names in the S&P 500 and you know nothing about them, to build up that confidence. But if you were to fundamentally weight them right now, based on a mix of things like cashflow and revenue and a number of other fundamental measures, many of those mag seven will still be near the same relative proportion, right? So this, like the question is yes, they have a very large weight from a market cap perspective, but they also, relative to the other names in the S&P 500 have a very outsized …

[00:10:22]Adam Butler: … in mind, I agree with that.

[00:10:23]Corey Hoffstein: …footprint.

[00:10:24]Adam Butler: That’s a fair point. But it’s not just about what that footprint is today, right? It’s also about what that footprint is going to be five years from now, 10 years from now. The market is supposed to be a discounting mechanism. Is the market expecting them to sustain this level of, these levels of margins and this growth rate in sales ad infinitum?

[00:10:48]Rodrigo Gordillo: That’s an…

[00:10:49]Adam Butler: That’s what you’re…

[00:10:49]Rodrigo Gordillo: … because I actually had this discussion, seconds before this podcast, with an advisor that asked the, basically said look, the last 10 years of the 60/40, U.S. 60/40 have been purely due to the fact that rates have gone down. And I said no, it’s purely due to these handful of stocks taking monopolistic rents, and the world thinking that they were just going to go up ad infinitum. And I don’t know where I heard this argument, but with AI here, that we’re looking at specifically talking about Google and how Google has made most of its profits on Search and with AI, and the ability for like, Perplexity AI and all the ability to just do it significantly cheaper, provide better results. Bard isn’t, I don’t remember if it’s Bard right now, or whatever name they have, Galaxy or whatever, it’s just not catching up, but they, that the moat has finally been broken and those monopolistic rents are being attacked, right?

So you’re right. If the market is a discounting mechanism and you have AI finally breaking the moats and a lot of these things, it might be time to share the love and it might be the end of it.

[00:11:58]Corey Hoffstein: What I do love is that people tuning into a podcast on Return Stacking definitely care about our views on individual stocks.

[00:12:04]Rodrigo Gordillo: You’ve got to create some understanding of what could change the mandate. So that brings me to… they can add, I guess we’re still trying to pitch diversification here. And it doesn’t really matter if you’re a …

[00:12:15]Corey Hoffstein: I think, part, I guess the point I would get at is it is very hard for a number of reasons to be an active manager. And Rod, you wrote about this and the stat always amazes me. And yet everyone will, there’s all sorts of things you can argue about the SPIVA report, right? But over the last 15 years, the number, the percentage of large cap funds that beat the S&P 500 was sub 13% I believe. So you’re talking about if you’re an allocator, to pick those active managers that were able to outperform that hot tech hand, required 15 years ago, figuring out who those funds were going to be, and then allocating to them, and then sticking with them, right? And I think our presumption is if they outperformed over 15 years, like your mind naturally goes to, it must’ve been smooth. I bet if you dove into those funds, it’s like there was one year that…

[00:13:05]Rodrigo Gordillo: That’s, I did that, right? So what I did is just, I went to YCharts and pulled, it’s their database. It’s not as wide as FIBA’s and doesn’t have survivorship bias. It was just a simple analysis. I pulled the 20 year performance of every single large cap U.S. fund, and I think it was like 3,200.

How many of them outperformed the S&P? This was shocking to me. I had to, I actually reached out to their team to say, this can’t be right. Like this can’t, he’s no, that’s, we see it too. 41 funds out of 3,200 that outperformed the S&P. And the most important part for me was let’s assume that that those 41 will continue to outperform for the next 20 years.

Even if we have that assumption, the next question was, what do investors and advisors care about most years? And they care about saying either to themselves as individual investors, or to their clients as advisors, we beat the S&P 500 this year. We beat our Index this year. How often are you doing that?

And the median, there were 21 observations, because they did 1994 to 2024. Out of 21 observations, the median outperformance of those 41 funds was 11 out of 21 years. So half the time you’re saying you did it, half the time you’re saying you’re not. The worst were six out of 21 years. So there’s a handful of managers that just probably had a handful of great years. The rest of the time it’s horrendous. And you’re saying I’m sure they’re going to get another great year like they did in 2017, or whatever. And then the best was only 13 out of 21. So it’s not like there was one outlier that outperformed the S&P all of the time.

So it’s just, it’s not only tough to pick. Even if you do pick and you get it right, if you are a god in a perfect foresight, you’re not going to get the consistency that everybody wants, right? And this is the holy grail of investing. Beating the S&P 500, do it consistently. And also the other thing that I found that was crazy was that the median outperformance was 0.3%, which again, I thought that was crazy.

[00:15:09]Corey Hoffstein: Which all raises the question to me I know that most investors are constrained, but we go back to this, like, why do people keep trying to fish in the same overfished pond? All the evidence suggests that large cap U.S. equities in particular, are pretty darn efficient. It’s a very hard market to beat, especially in a public mutual fund or an ETF. Just, the evidence suggests, for the duration most investors are willing to allocate, it’s a very hard market to beat.

And so again, to me, going back to the core question of people asking us, okay, we care less about risk management, we care more about the right tail right now. If you can unshackle your risk budget from this long-only concept and just say, let me just get the beta and let me stack something else. What do we have more confidence in generating positive excess returns on a more consistent basis, than stock picking. And I think there’s a whole lot of things that I would rather spend my active risk budget on.

[00:16:06]Rodrigo Gordillo: Yeah. It’s the idea of dictum that the markets are micro efficient, but macro inefficient, as Adam likes to say over and over again,. I think you fact checked that Adam? 99.99% of the computational brainpower of investors goes into picking better stocks than everybody else.

Nobody really focuses on the structural macro alpha that you could take advantage of. And really in the piece that I wrote, Return Stacking- A Different Way to Outperform our Benchmarks, we make a case for that structural or alternative beta on top, so that you can have this ability to outperform without necessarily stacking more risk.

In fact, what we show is that the peak-to-trough losses are lower. And the return in this particular case, where we stacked 25% Trend and 25% Carry using the DSAM Carry Index was 3.2% outperformance with lower drawdowns, and 21 years of more consistently saying, yeah, with my a hundred dollars, I was able to beat the S&P 18 out of 21 years.

So again, it’s, it comes down to the basic. I got X amount of money. I want to do something. If you care about beating the index, you can try as hard as you can competing for that money against other stock pickers, or you can simply just think about macro inefficiencies and use that to your advantage, and I don’t think anybody’s using that to their advantage.

[00:17:38]Mike Philbrick: Well, and I think the other thing is the emotional tracking error challenges that come with approaches that have many years, whilst they might outperform the S&P, they have many years of underperformance. So the classic one was Warren Buffett through the 1998 to 200-2-3, obviously Warren Buffett, a very astute investor, but underperformed the S&P by an astounding amount, was behind by about 50 percent at the peak of the 2000 market. And so how many people were able to weather that storm of that massive of a tracking error, in order to stick to the plan of the Warren Buffet hood?

And this is where, I think Corey, you always coined this, like the behavioral aspect and the stick-to-it-ness, the ability to actually do the thing that’s required is a big part of it, and emotionally, being able to celebrate with your friends while they’re celebrating, and then suffer a little bit, but maybe suffer a little bit less than your friends when they’re suffering. There’s a lot of human, a lot of humanity in that.

And just as an aside, just thinking about that, the tracking error, I pulled up RAFI, and we talked about an index that is more fundamentally weighted. It’s a pretty big difference from the cap weighted index. So if you’re going to fundamentally weight NVIDIA, not in your top 10 for RAFI. You have half weight in Microsoft, half weight in Apple, significantly reduced weight in Alphabet. Biggest bets are Intel, Berkshire, Citi, Bank of America, and J.P. Morgan on the outside, upside bet. And then the under weightings are Microsoft, NVIDIA, Apple, Amazon, and Tesla. You can imagine, that’s as of December, end of December 2023, so you can imagine the tracking error that this is inflicting on people to be weighted in a fundamental way, or I go back to my example of Warren Buffett in the 2000s, where he had lost his touch. Those are emotionally trying issues. And then, as an advisor, you always have to think of what is the tracking error. The tracking error for someone in Texas is different from the tracking error for someone in Silicon Valley, potentially. The advisor has to be aware of those intricacies on the personal situation of the investor.

[00:19:59]Rodrigo Gordillo: Not only that, I think what’s interesting is those managers, when I was just listening to a podcast from the guy from Greenlight Capital, Einhorn and a couple other well known names, these are managers that outperform because they concentrate in 9 to 12 positions, and just go, they just, their tracking error is insane. Their volatility is twice as much as the markets, but they perform like Warren Buffett. I think we know from the work that AQR has done that I think it’s 1.6 percent Liebert quality. Is that, am I right? So there’s the…

[00:20:34]Adam Butler: 1…

[00:20:35]Rodrigo Gordillo: …stacking and it shows and he’s stacking in one risk, right? So it does show with the volatility.

[00:20:42]Mike Philbrick: The thing too, his portfolio is a portfolio of securities which is a security, set of securities that funds insurance, and there’s a very low correlation between investment returns and insurance claims. And so there’s a number of layers, not just his investment portfolio. It’s how the investment portfolio is funded, how they underwrite insurance.

They don’t write it when it’s cheap. They only write it when they can make money on it. They take a bow and don’t write as much as they, and so they have this constant cashflow. They have payouts on the other side that are not correlated to anything because they’re related to natural disasters insurance claims. So there’s a myriad of things in the stack that Warren Buffett does that are magic. It just can’t be achieved by the individual investor, not to mention the permanent capital…

[00:21:29]Corey Hoffstein: The permanent…

[00:21:30]Mike Philbrick: … to mention the ins and outs.

[00:21:32]Corey Hoffstein: I would argue Warren Buffett would have been out of business a number of times if he was running a public fund, right? He just would have run out of capital. It’s just how…

[00:21:41]Mike Philbrick: The 2000s are a classic example of that. He would have been like Oak Mart and Howard Marx’s firm, broke my…

[00:21:48]Rodrigo Gordillo: Oak Tree. Okay.

[00:21:49]Mike Philbrick: Right. They and GMO, they were, they suffered mightily in that period of 2000, in particular was quite close to, I don’t know if they were closing the doors, but they were low on AUM.

[00:22:00]Corey Hoffstein: If I can, a consistent theme in my career is stealing from Cliff Asness, so I’ll steal a quote from Cliff or paraphrase him, which was, he talked about the difference between behavioral time and statistical time. And us, as asset managers in our ivory tower, we always look at things and say, look, yeah, absolutely, something with a 0.3 Sharpe can be underwater for a decade. And so we see it on a back test, or we, even when we live it in real life, if we can be objective, we’re like, that’s just life. That’s, that is the risk adjusted return of this asset class, and yeah, we realized the risk and the return wasn’t there, but that’s why the expectation of return is there.

You can’t always go up, but in behavioral time, right, that’s like dog years. That’s okay, you want to perform for three years. You might as well have underperformed for 20. And so you just get this time dilation effect between people who are designing strategies versus the people who are investing.

And so again, I go back to Rod, your piece talked about man…, talking about managed futures and carry as an overlay and the macro inefficiencies that you might be able to take advantage of by investing in global futures, commodities, currencies, rates, bonds, and equities. I wrote a similar piece and I just said, look, even if you don’t implement these strategies yourselves, like, there are diversified alternative funds out there that you can get access to, global style premia, systematic macro, trend following, reinsurance, cap bonds, diversified arbitrage, Bitcoin, all packaged together. And if you can stack that diversified package of alternatives, do you think that diversified package of alternatives has a higher likelihood of having a positive excess return on a more consistent basis than value investing, even a diversified set of active factors? Again, I think the evidence suggests that even if you just stick to the stuff that you think is a risk premium, like just pure merger arbitrage and that sort of stuff, I still think the evidence is more in the favor of stacking the alternatives than in stock picking.

[00:23:56]Rodrigo Gordillo: And that’s, that piece is excess returns through a structural edge and the way you can, you picked some of the older ones, right?

[00:24:05]Corey Hoffstein: Yeah. I just, I picked the three funds that came to mind. So it was just pure survivorship bias. Let’s be honest here. I just picked, I think I picked AQR and Stone Ridge and FS who all have multi alternative multi strategy funds, and I’m sure there are others that have gone out of business for bad performance. But the point wasn’t go buy those funds by any means. The point was…

[00:24:25]Adam Butler: What funds were those, Corey?

[00:24:26]Corey Hoffstein: AQR.

[00:24:28]Rodrigo Gordillo: … diversifying strategies.

[00:24:29]Corey Hoffstein: I see what you’re doing. You almost got me, but the point though, again, the point just being, by buying those three funds, they gave access to a huge breadth of alternative strategies, right? You were diversifying your diversifiers, and do you think that breadth of alternatives, even after fees and taxes, has a higher likelihood of creating out performance, positive excess returns versus active stock picking, and it’s hard for me to not say yes to that question.

[00:25:00]Rodrigo Gordillo: The issue of course, is that those funds at any given time over the last three years, independently or together would have been fired. You would have been fired if you just had them, if you just owned them as your thing compared to the S&P, right? Yeah. But it is the idea of doing whatever it is, like as much macro non-efficient areas that you can stack your portfolio with, I think something again to shine the light on. And that piece does it really well.

[00:25:30]Corey Hoffstein: … thing that just really quickly, the other thing that I think that gets overlooked here a lot is, and I, most advisors I talk to, if I ask them what their active risk budget was, they probably wouldn’t have an answer. I don’t think most advisors talk about active risk budgets, but they have an intuition for how off the S&P they want to be, right?

And it’s normally like, they want to be plus or minus 5%. They never want to be that much off. And that can be difficult when you’re talking about combining a bunch of active managers, right? You pick five or six active stock pickers. You need to understand their style drift potential. You need to understand their different styles, how and when they might overlap, how much active risk those managers are taking and how that all comes together, versus if you take a stacking approach, basically the vol of your stack times the size of your stack is basically your active risk, right? And so you can size that stack up and down for how much risk you want to take versus the S&P, right? You get, create a diversified set of alternatives that have a vol of 10. You give it a 10% allocation, 10% stack, great. Your active risk is 1%. You’re going to be in, in 99% a year, is plus or minus 3% of the S&P 500.

[00:26:43]Rodrigo Gordillo: Okay, so let’s talk about that.

[00:26:45]Adam Butler: … this drinking game.

[00:26:46]Rodrigo Gordillo: Yeah. Okay. No that’s fine. You

[00:26:48]Mike Philbrick: We need to get stacked.

[00:26:50]Rodrigo Gordillo: This is called the Return Stacking podcast. Get over it. So…

[00:26:53]Corey Hoffstein: Gimme another name Adam.

[00:26:55]Rodrigo Gordillo: That’s a metric, Corey, that you’ve thrown out before, and I think it’s a decent heuristic, but it’s not necessarily true, depending on how correlated those assets are, right? You’re not just stacking 10%, if you’re putting a 10…

[00:27:09]Corey Hoffstein: … saying if the stack is, has a 10% vol, if you look at the overlay as a whole, if you, yeah, I agree. If you, if it’s multiple things that are 10%, that math doesn’t work, you need to look at their vol in combination as a portfolio.

[00:27:22]Rodrigo Gordillo: So it might be lower is what I’m saying.

[00:27:24]Corey Hoffstein: Yes. Yep. Yep. Yeah.

[00:27:26]Rodrigo Gordillo: It’s a good…

[00:27:26]Corey Hoffstein: Yeah. If you do 10% managed, if you do 10% managed futures plus 10% carry, you’re probably getting a sub 10% volatility combination.

All WeatherAll Terrain[00:27:34]Rodrigo Gordillo: Exactly. Now, we’ve been focusing on the S&P and trying to, yes, and that the problem of FOMO right now, but I think it’s, this is precisely the moment that I think we need to be talking about All Weather and All Terrain too, and this is a time when nobody wants to talk about it. I know, Mike, that you’re your intuition tells you that this can probably go on much longer than we think. My intuition says the other way and generally is that way, but I’ve been wrong for a while now. One of the things that I think we should talk about is the, that we finally spent some time and put together some new model portfolios behind the website that really deal with All Terrain investing. So we can’t really talk about it or show anything because it is behind that, and it’s only for sophisticated investors, but for those advisors that are interested in seeing how we’ve thought about the All Weather problem, and the way we think about it in All Weather, All Terrain is, we think about it in different risk metrics, right?

Less about what percentage stack, but rather, you want an All Weather portfolio, All Terrain portfolio at 6% volatility target, at 9%, at 12% target, at 15% target, depending on where you are in your life and your glide path. We put that together. And so if you happen to be an advisor or anybody that is sophisticated enough to get access to it, go to the website, ask for access and the information is there and hopefully, we can help do this before the storm.

[00:29:01]Adam Butler: Very…

[00:29:04]Mike Philbrick: It’s a balancing act between optimality from the standpoint of an investment framework and not knowing the future. So diversifying and being balanced across your risks, versus what kind of tracking error can you sustain over what kind of time periods. And this is where you need the professional advice of an advisor often, to help you understand that. Your heuristic is a good one, but how do you help advisors think through that? And that’s what the model portfolios do. They help you look at that and get some intuition as to how much tracking you might be able to withstand, because it’s not zero, or one. You don’t have to go to full optimality.

There’s a hybrid where you can say I need to track this much, and I need to look like the S&P 30% of the time, or 50% of the time. So you need to think through that. Yeah, and those model portfolios, I think can be very helpful in providing intuition and insight around that, as an advisor/allocator.

[00:30:07]Adam Butler: Might be helpful to go through some of the thinking, mechanical thinking that went into the development of those portfolios.

[00:30:16]Rodrigo Gordillo: Adam, why don’t you go? Good.

[00:30:18]Adam Butler: We can go back to, nothing new under the sun, right? We have long embraced the general framework proposed by guys like Harry Browne with his Permanent Portfolio, and Ray, what’s his name from Bridgewater?

[00:30:31]Mike Philbrick: Right? Dalio. I’m like, you can’t mean Dalio.

[00:30:35]Adam Butler: I know, yeah.

[00:30:37]Corey Hoffstein: But I hope you saw his Instagram post today where he looked like he was high on Molly at a Taylor Swift concert.

[00:30:42]Mike Philbrick: I didn’t, I can’t wait to go see.

[00:30:44]Corey Hoffstein: Yeah. He was saying Taylor Swift for President. He was at the Singapore concert. Anyway, moving on.

[00:30:48]Adam Butler: Don’t know where I pick up off that comment, but…

[00:30:52]Corey Hoffstein: Tell me where that fits in his regime framework.

[00:30:54]Mike Philbrick: Yeah.

[00:30:56]Adam Butler: Anyway, so back when he was focused on investing, I guess he espoused or wrote about this concept of All Weather investing. And we had a good chat actually with a couple of Bridgewater alumni, Bob…

[00:31:11]Mike Philbrick: Elliot.

[00:31:12]Adam Butler: …and Andy Constan over the weekend. And there’s a number of different kinds of takes on this, and some people have called this kind of global risk parity, and they, that typically is built a little bit differently, but with the same objectives. And the All Weather concept is designed to be a portfolio where you’ve thought about what each of, the sensitivity of each of the assets that you hold in that portfolio, to changes in expectations around inflation and growth, right?

So you’ve got some markets either because they’re long-duration assets, or because they’re particularly mechanically connected to a certain dynamic in markets, are more likely to have a very large shift in their price in the event of a meaningful shift in expectations about inflation or growth. Others, think about copper or crude oil or very long-term Treasury strips, and then you’ve got other assets that typically you have a more muted reaction, but still predictable, in a certain direction, right?

When inflation ticks a little higher than expected, we expect short-term rates to rise in anticipation of a greater probability that the Fed is going to intervene, and maybe raise rates at some point in the future. That doesn’t really have a huge impact on price because it’s such a short duration asset, right? So we always, we like to think about diversification from an All Weather context as being a combination of diversity and balance, where diversity is holding assets in the portfolio that will mechanically be expected to respond in very different ways for different reasons to changes in growth and inflation expectations, but also account for the fact that different kinds of markets will react with different magnitudes to those changes, right?

Two year Treasuries are going to react in very different magnitudes than long-term strips., both of them likely to react in somewhat the same direction, but you want to make sure that the risk of each of those assets is held relatively in balance in the portfolio, right? So that’s the idea of risk parity. It’s diversity, and that’s what we try to do with All Weather, but we try to take more of a Bridgewater approach where we analyze the different inflation and growth scenarios and the types of inflation scenarios, and then went back and looked at history to determine just what direction on average, and on average, how much the different constituents of the portfolio reacted in each of those shifts.

[00:33:54]Rodrigo Gordillo: I think we’re calling it All Terrain because we’re adding the extra level of how does trend react in those regimes, right? Much like when you think about equities, commodities, bonds, we get a figure or feel for what they do at different times. And, commodities clearly will do well in a demand pull inflation scenario. You’re going to have Treasuries do well when there’s a non-inflationary bear market, and equities do well in a growth environment. Trend following seems to have a hybrid in terms of its maximum movements tend to hover around periods where trends are really clear.

Oftentimes that happens during bear markets. Sometimes it happens during massive bull markets too, right, when there’s a right tail and a clear trend happening in a handful of markets, but it also, so it has this hybrid benefit of doing really well during bear markets, but also tends to do relatively well in inflation regimes. So it straddles the world of Treasuries and commodities. It has a unique place in that framework that ultimately led to allocations across our model portfolios.

[00:34:58]Adam Butler: I think in general, the idea is that you want to expand the idea of All Weather to the greatest extent possible by adding as many sleeves that are going to behave differently. Some sleeves are agnostic to inflation and growth. Other sleeves have very predictable responses to them, but the idea is to just get general diversity. You’ve got a lot of uncorrelated bets in the portfolio, typically more the merrier. Thank you. Take care.

All Terrain[00:35:28]Corey Hoffstein: Adam, how do you think about, and this was a conversation you put out on Twitter over the weekend, and you didn’t get many bites. And I said, I’m just going to, I’m going to respond, just to try to get some conversation going. And then it seemed like a lot of conversation did get going around this, which was great, but I made the point and I, just for the sake of argument, I was saying, to back up a sec, you had highlighted an interview that Bob Elliott had done with the gentlemen over at Excess Returns about how he invests. And he took a similar All Weather approach, and then added things like trend and diversified alpha as active diversifying components, in combination with his risk parity. And you said, why would you not do this? And my rebuttal back was confidence-adjusted. I have a stronger view in stocks and bonds maintaining a positive risk premium over the long run, than I might have in something like trend or carry or a systematic macro strategy that is inherently generating its P&L, not from a risk premium.

Now maybe trend and carry actually are risk premia. That’s a totally different point but I want to get your thoughts is, when thinking about designing an All Terrain strategy, like how do you think about confidence, adjusting risk premiums, your view that trend will actually respond the way you expect it to, versus commodities. There’s almost like a true mechanical reason why they’re going to respond to a certain way in the regime, because almost by definition, the regime is that regime because of the prices change, right? Like you can’t have an inflationary regime where prices don’t change.

My question is, how do you think about designing an All Terrain strategy where maybe you have a lot more confidence in that delta component of something like commodities, then over the next 20 years, are you confident that trend is going to respond in an inflationary regime the same way it did in the seventies and eighties

[00:37:17]Adam Butler: Yeah, I don’t think we’re making a strong case that you want to own trend to protect against an inflationary regime only. I think the case is that you want trend because it provides time varying exposure to different broad asset class categories. And look, we can have a variety of different explanations for trend. One of them might be related to the fact that typically when market expectations change, they don’t change overnight, right?

It took a long time for the market to come around to the fact we were going to have a sustained inflationary shock after the first larger than anticipated CPI print. We had to have a lot of larger than expected CPI prints in concert with some fundamental narratives around the war in Ukraine, et cetera, in order to allow that narrative to shift. And it’s that meandering shift in narrative, and investors in a staggered way, as different investors come to believe there’s a shift and develop confidence in that shift at different times, there’s a shift in allocation, and those flows then drive divergences in prices that trend following managers take advantage of.

One might argue that trend following is mechanically designed to, especially intermediate to long-term trend following, is mechanically designed to profit from these, kind of, diffusion of shifts in expectations about inflation and growth. So where you’ve got a passive All Weather, not taking a position, just equally anticipating inflation and growth regimes at all times, trend is a nice little overlay that takes advantage of changes and expectations that go on between those different regimes, and help to offset the fact that if diversification means always having to say you’re sorry, or always having regrets, obviously you can’t be in all four regimes at once.

So there’s always going to be at least one asset class that is disappointing you and other asset classes that you might have allocated more to that are doing better than you’d hoped or expected. And that causes regret, right? So in, you could imagine a scenario where adding trend helps to alleviate some of that regret, because as investor expectations are changing, we’re reducing exposure to the regimes that investors are abandoning, and experiencing some of that appreciation in prices where investors are reallocating their capital to.

[00:40:26]Rodrigo Gordillo: Sovereign bonds for non-inflationary bear markets and commodities for inflationary regimes. What you find over the years is that almost every year, two out of the three pistons are going up.

And that’s what creates the stability of returns that you see over time and risk parity. But there are moments where two pistons are down, and one is up, and what will happen is if your equal risk across those three, you will have risk parity suffer. I think the concept of this trend following component that straddles both bear markets and inflation regimes gives that fourth piston that will give it a fighting chance to not lose, or maybe even make a little bit of money because it has that two going up, two going down.

If we look to 2008, for example, out of those three pistons, you had equities down, commodities down and Treasuries up, that was, that still hurt risk parity and equal risk. If you add a fourth component, trend, you at least have a fighting chance of not losing. In 2022 you had commodities up, and equities and bonds down. By adding that trend component, and we know this empirically, you had a good chance of at least not losing.

And so there are examples of this. And then sometimes it’s all of them go down together. So COVID, in the beginning, you saw Treasuries go up, equities and commodities go down. But then the liquidity crunch hit where everything just went down together. And the only way you can make, have even a shot at it is if you’re lucky enough where trend happened, to be short the right things to make some money during those moments of maximum pain.

So I think the risk parity concept is good. The fact that you can count on the risk premium of equities and bonds, great. If you can lever enough to add commodities in there, which, there’s still the argument whether commodities have a positive risk premia or not, but if you’re stacking it on top, and the real return is zero, it’s a zero cost hedge for inflation. Not bad, right? And then you add that trend component, that’s the magic. And of course, what I always have to think about is, do we have the same type of clarity for other risk premia out there?

[00:42:42]Mike Philbrick: I was just going to say Rodrigo, if you like the steak knives, and you like the cutting board and the free shipping, have I got a deal for you? I’m wondering if Adam can shed some light on how carry compliments risk parity and how it covers off sort of the blind spot that is a very sort of somewhat obvious one in risk parity, and does such a wonderful job for it. You might get two sets of knives, a cutting board and free shipping here.

[00:43:11]Corey Hoffstein: Have you ever tried the Cutco scissors? Those are really good, the knives and the scissors.

[00:43:14]Mike Philbrick: … knives and the scissors, but Adam, can.

[00:43:16]Rodrigo Gordillo: You can?

[00:43:17]Adam Butler: Those of you at home, try not to cut yourselves. Okay.

[00:43:19]Rodrigo Gordillo: Disclosure.

[00:43:20]Adam Butler: You’re leaking a little bit of Alpha here. We’re…

[00:43:23]Mike Philbrick: Well, right, you’re right. So let’s take that offer off the table.

[00:43:26]Adam Butler: I think it’s nice that we can set the table a little for risk parity, right? Risk parity assumes that there’s always a positive term premium, and in bonds, there’s always a positive risk premium, and equities. There’s always a backward dated term structure in commodities. And the fact is that’s just not always true.

We just lived through a really salient example of where that was proven to be fallacious, right? You’ve got 20, I think the yield curve is still pretty darn inverted, and it has been since 2022. There haven’t been a lot of examples of an inverted yield curve over the past forty years. The yield curve spent quite a lot of time during the ‘70s inverted, but we just haven’t had a lot of examples. Typically bonds do have a positive term structure, right, so you expect higher returns by locking your money up in bonds further out than you expect to get if you have a chance of getting your money back at par in a few months time, and you expect a higher return on equities than you would get on cash.

But, interestingly, at the moment, you can get about 4.5% or pretty close to it on cash-like instruments, and the yield on the S&P 500 is sub 2%, right? Commodities, in theory, most of them are always in a backwardation, which means that you’re earning a positive carry on holding a basket of commodity futures, but in reality, they’re not in backwardation all the time, oftentimes for supply demand dynamics or seasonality dynamics or what have you. They flip between backwardation and contango. My point is, risk parity assumes that there’s always a positive risk premium across all of the assets that you hold, but in reality, that’s not always true, and what carry does is it says, I want diversity, and I want balance, but I’m not going to assume that all of the markets have positive excess returns all the time. And where the yield curve is inverted, or the commodity term structure is inverted, then I’m actually going to hold more short-term bonds against long-term bonds, or I’m going to hold some commodities short, or I’m going to hold some markets with a higher yield, some equity markets with a higher yield with larger weights, and hold some equity markets with a very low yield, short. And it turns out that if you apply kind of risk parity principles, but you’re always aligned in the direction of the expected risk premium, that historically, that’s just generated a lot more, a lot stronger, and a lot more comfortable and smooth return trajectory.

[00:46:23]Rodrigo Gordillo: And so the assumption in risk parity is that there is a positive risk premium across the things that you invest in at all times, right?

[00:46:30]Adam Butler: Always and everywhere.

[00:46:31]Rodrigo Gordillo: Because it is one of those concepts that is about preparation, not prediction. You don’t know the future. Broadly speaking, if you were to close your eyes, put something to work and then wake up 20 years from now, that should still stay, right?

[00:46:45]Corey Hoffstein: I think you can make an efficient markets argument about that too, right, which is broadly speaking for risk assets, if they didn’t have a positive expected return, the price is wrong. The only case that’s not true is if they offer a tremendous diversification benefit, right?

[00:47:02]Adam Butler: Yeah. No, that’s a really good point. That’s the theoretical justification for a global risk parity or All Weather portfolio, right? And most of the time it holds true empirically as well, right? It’s not so common, or it’s not an all the time or most of the time tech thing, and commodities, it’s a lot of times when commodity term structure flips around and you would vastly prefer to be short than long, but when the term structure does flip, it historically has been really profitable to take advantage of that.

[00:47:35]Rodrigo Gordillo: It’s in it. The difference I think between a risk parity concept, again, it’s about set, forget. I just had to write my, in my will, what I want my money to do when I die. One of the key things was, what can I count on for people not to screw up, where I don’t need somebody managing it day to day. And I want just set it and forget it, a risk parity concept for a 20 year portfolio, 100 year portfolio, it’s good with me.

But if you have the opportunity to be more thoughtful about kind of the nuance, and you think about the assumptions that risk parity makes, they’re really long-term assumptions. The assumptions that carry makes is, look, there are periods where we can clearly observe that it’s a bad idea to be long. These things compared to cash or whatever the case, is finding a strong carry component in all these asset classes, predictive that it’s going to continue to provide different positive returns in the future.

And we find, many papers have found that it is, and so it is an active way if you, and it’s very diversified, because you’re using as many assets as you can, and you’re weighting them in a risk parity component, but the weighting then, you have the ability to short, and the weighting is defined by carry and risk rather than expected risk premia and risk and long only, right?

So you’re removing that short component. You’re having a slightly separate assumption and it turns out that it has this characteristic of doing pretty well most years, like risk parity does, and then when things really go poorly, especially if it’s adjusted slowly, a lot of people have this hang up that carry gets crushed in bear markets, right, because I think a lot of people relate the word carry to the Yen/U.S. dollar carry, which tends to be true.

[00:49:22]Corey Hoffstein: Or vol carry.

[00:49:23]Rodrigo Gordillo: Or vol carry. But when you’re doing a diversified risk parity style carry, what it turns out that most of the time, it gets out of the way, does it, at the very least doesn’t lose too much money, and sometimes it actually makes positive returns during periods of prolonged bear markets, right?

[00:49:42]Adam Butler: On average, historically, global carry has had positive returns during the worst quarters for equities and during the worst equity sustained bear markets.

[00:49:57]Rodrigo Gordillo: And mechanically…

[00:49:58]Adam Butler: No, there’s just no relationship.

[00:50:01]Rodrigo Gordillo: … mechanically it makes sense, but it’s also not as good empirically as trend in protecting those big abrupt gaps that you see in equity markets, because…

[00:50:12]Adam Butler: Trend is structurally designed to be more responsive during those higher volatility tail events.

[00:50:21]Mike Philbrick: … going to smile.

[00:50:22]Rodrigo Gordillo: It’s just for me, when I look at the, if you’re thinking about adding on different stacks or different alternatives, to me, the next best thing is carry, because it also empirically has shown very low correlation to trend. So what are you looking for here? You’re looking for low correlation. Equity and bonds have low correlation. Equity, bonds, trend have low correlation. Equity, bonds, trend, and carry a low correlation and cross-correlation with each other, which is fantastic. And it’s really approachable, rather than trying to find alpha managers that can’t tell you what they’re doing. Because this, once the secret’s out, you can’t sustain it, right?

[00:50:55]Corey Hoffstein: Rod I, that comment you made about your will, I’ve also thought a lot about in the last year, given that parenthood came upon me and thinking about, I actually had to put together a will and I, it’s just something I’d never done and all that sort of stuff. And I was thinking about the scattered nature of my investments and that my, if I died my wife would kill me, and a huge part for me of the Return Stacked Mission was launching these products, such that I could basically get 99% of the way of my perfect portfolio in three or five products, and combine them and just say to my wife…

[00:51:28]Rodrigo Gordillo: Do that.

[00:51:29]Corey Hoffstein: … or not even my wife, to maybe just leave them. But if…

[00:51:31]Mike Philbrick: If I’m dead, don’t kill me.

[00:51:33]Corey Hoffstein: Yeah, exactly.

[00:51:34]Rodrigo Gordillo: That’s the best compliment that I’ve gotten, because I was in a Spanish podcast the other week, and I mentioned that I was going on a trip and my wife wanted me to fill in all the things, including the portfolio. And I told him what I decided to do. And he was inspired by that and came back to me and said, just so you know, what you’ve created, what you’ve pushed out, that’s 100% of what my wife is going to do when we die. I’ve made it explicit now, and I think it speaks to the ability to get access to that easily, and with enough education, that it makes sense, right?

[00:52:08]Corey Hoffstein: By the way, Mike, I know you’re laughing at the fact that I said my wife would kill me if I died, but you’ve met my wife. She would find a way to bring…

[00:52:16]Mike Philbrick: That’s what makes it so funny.

[00:52:18]Corey Hoffstein: … kill me.

[00:52:19]Rodrigo Gordillo: To re-kill you. And by the way, Corey…

[00:52:21]Mike Philbrick: She might kill some of us. You might come after some of your friends just to…

[00:52:26]Rodrigo Gordillo: Just so you …

[00:52:26]Corey Hoffstein: Oh, thank you. I appreciate that offer.

[00:52:28]Rodrigo Gordillo: Ah…

[00:52:31]Mike Philbrick: … wife. You can have the kid. I’ll take care of, Lord, it’s fine. I’m a giver.

[00:52:37]Adam Butler: I just want to go on the record as saying that I want my lifetime stack to just be trend and carry and the fucking stocks and bonds can get stuffed.

[00:52:50]Rodrigo Gordillo: That overconfidence coming out, Mr. Butler, every time.

[00:52:55]Mike Philbrick: What do you mean?

[00:52:57]Adam Butler: That stocks and bonds are massively over-owned. That they, if anything’s got over-confidence, it’s the confidence in equities and bonds, and that there’s just very little attention being paid to these alternatives.

[00:53:12]Corey Hoffstein: I think the difference Adam is, I’m talking about multi-generational wealth here. I’m talking about hundreds of years, right? That’s, and hence I want long-term equity exposure.

[00:53:23]Rodrigo Gordillo: Your lineage requires…

[00:53:24]Corey Hoffstein: Right. I got to think about simplicity.

[00:53:26]Rodrigo Gordillo: So one of the things I want to talk about as a glide path, reimagined pieces, Corey, and I don’t know if you want to get into that a little bit, because I thought, I’ve been dying to write about that for years and never got around to it, and I’m glad you finally did. Do you want to walk us through that, maybe part one, or part two, or…

[00:53:46]Corey Hoffstein: So Steven Braun on my team wrote these, they’re a rebuild of some articles we wrote, I think, in 2017. And the idea here was to say glide paths are a wonderful invention for most people who are not going to think deeply about investments, but the reality is, not every 50 year old is in the same financial situation.

So is there a way in which we can try to generalize the problem a little bit more, and try to find what would be the optimal portfolio for someone of a certain age, and of a certain wealth level? Now, optimal here can take so many different definitions. We just defined optimal as being maximizing the probability of having, of not running out of money before you die. And then we said, instead of saying how old someone was, we were just going to try to measure years from death, right, because you could be a very healthy 90 year old and have a higher life, living expectation than a very unhealthy 60 year old, right? So we really wanted to generalize the framework as much as possible.

But the idea was, if you died with a penny to your name, that was considered success. There was no benefit for excess bequeathment. And then starting with that assumption, we walked backwards and took a step backwards and said, every year you’re going to spend one wealth unit. And we’re going to have to figure out what, for, given how many wealth units you have, what portfolio should you invest in such that you then don’t run out of money over that next step. And you keep walking that process backwards.

And this really interesting sort of zone region emerges in this grid. And if you look at it, there’s really three primary zones. One is this top right triangle that says you have enough money that you’re just not going to run out. Just don’t mess up. You could invest in cash. You could invest in a diversified portfolio. As long as you’re not spending all your money on lottery tickets every year, like, you have so much more money than you’re planning on spending. It’s a do anything zone. And we said, we’re just going to put that in the most conservative portfolio possible. That’s all in short term T-bills, but really there’s a lot of flexibility to what people could do there.

You then get into the second zone that says, all right, this is, and this is where there’s more of a gradient that says, okay, how, you don’t have enough to do whatever you want. You need some growth, but you can’t necessarily go all growth because then you take too much risk, too much drawdown risk. And if you get too big a drawdown, then those, that amount you plan on spending in retirement represents too large a portion, and then you can outspend whatever you have left. And so you find these portfolios of varying diversification between stocks, bonds, cash, and trend following.

The final zone was at the very bottom, which said, you do not have enough money. You are going to run out of money, guaranteed. You better swing for the fences. And that’s where you saw risk dialed up.

And so the first article did this without any stacking. And what you saw was, at the very bottom, you were all in equities because you had to really crank up the risk. And that top right triangle, you were all-cashing. In the middle, it was a mix between stocks, bonds, and managed futures trend following, depending upon how safe you were. The safer you were, it was more bonds and cash. Towards the bottom, the more growth you needed, it was a mix between stocks and managed futures. What was interesting is when we got to adding, and that was the second article, and said what if we allow this to go up to a stack of 200%? What would you end up doing? And what was interesting is the optimizer almost never recommended a stack of 200%, except in that case where you were guaranteed to run out of money. And that’s just pure lottery ticket.

But in those diversified portfolios, it was mostly recommending a stack between 10% and 20%. And it was a very diversified portfolio of stocks, bonds, and trend following. And it increased the likelihood of success compared to not stacking by I think 30 or 40%.

[00:57:59]Rodrigo Gordillo: As this…

[00:58:01]Corey Hoffstein: What you saw emerge effectively was, through the use of stacking, aka leverage, you were able to benefit from diversification, and have a greater certainty that you were going to meet your desired outcomes in retirement.

Now, again, all caveated around, this is all simulation based. We have one very simple definition of success, but I think the framework holds intuitively that again, more diversification is typically better when it comes to having greater certainty in your outcomes.

[00:58:31]Rodrigo Gordillo: As you can extract those rents from the asset classes that you would otherwise need to go 100% on, to get lucky, right, especially if you’re getting into that space where you don’t have enough. You have to go 100% equity. Okay, what if you can go 100% equity and 50% something else, right?

[00:58:49]Corey Hoffstein: Well, tell you what, here’s, really fascinating. You’re talking about that 100% equity plus something else. When you talk about stacking and the lottery tickets, you ended up not having as much equity. That part, where it’s, you really need to outgrow, you ended up doing a ton of trend following, because trend following has historically had much more asymmetry in the returns. It had years where upside was similar to equity, but it never had downside years that were similar to equity. And so, it was able to apply more leverage to trend following to try to get that asymmetric positive payoff, versus loading all up on equities and risking running into a 2008.

[00:59:28]Adam Butler: I hear you. No need for equities. Loud and clear. Yep. Yep. Yep.

[00:59:32]Corey Hoffstein: Well, that, and that is the takeaway.

[00:59:34]Rodrigo Gordillo: Yeah. This is not investment advice from Adam Butler. Yeah, I think that’s, what’s interesting about all this is, I was speaking to a planner today that had started going down the rabbit hole in the content. And he’s I cannot believe I’ve never heard of this. I don’t understand it seems like it’s magic.

And what I told him is that you weren’t talking about it because it wasn’t available to you. You couldn’t do it. So what’s the point, right? It’s like doctors, I was listening to Dr. Peter Attia and it was talking about how, when they would decide to do certain tests or not, and there are certain tests that they simply will not do, even though it’ll tell you that something bad will happen to you, because there’s nothing they can do.

So the ethical thing to do is to not run the test because it makes, there’s nothing, no intervention that will make their life better. And that’s what I told him. Like I, there was no intervention that would make your life as a financial planner better, until recently. And so what does that mean? It means that we’re just waking up to all of this.

Again, going back to Peter Attia, what he talked about is that the, what’s happening is that even though guidelines have changed for a lot of things, it’s only the younger doctors that are up to speed and reading and motivated to do better for their clients than the older doctors that are set in their ways, are not going to those conferences and learning about it, and changing their practice.

That’s going to be really hard, that it’s going to be the next generation that is going to have the motivation, tools and access to be able to apply these new technologies, right? So I feel like there’s an opportunity for everybody here in this space to do better. Understand how glide path re-imagined works, understand how you can actually have your cake and eat it too, and provide that absolute, or attempt to provide that absolute return without, and adding diversification without sacrificing your core stocks and bonds and all that fun stuff.

But it’s going to take a lot of years and Herculean effort for us to continue to educate, and everybody else to continue around us that is talking about these concepts.

[01:01:42]Adam Butler: Mike, do you remember growing up and traveling and you had these big suitcases, and you had to carry them around, like with a handle?

[01:01:52]Mike Philbrick: Yeah, there was no wheels.

[01:01:54]Adam Butler: Did you know that wheels on suitcases didn’t come out until 1987?

[01:01:58]Mike Philbrick: Yeah. Oh yeah, I’ve heard that

[01:02:00]Adam Butler: Like I remember traveling as a child and carrying

the bags around. Before that time, there were…

[01:02:07]Corey Hoffstein: … again?

[01:02:09]Mike Philbrick: That’s how long it took?

[01:02:10]Adam Butler: Exactly. This is what I mean. Yeah, I talked to everybody and they hear about this and they’re like, no, this can’t be like that. We’re, I’m just hearing about this now? It can’t be that you guys, that this is the first time anybody’s ever done this. I’m like, wheels on suitcases, 1987, right? But it just, for some reason, it takes a long time for us humans to figure out why we can’t, what these dead obvious solutions are.

But of course, now you wouldn’t be caught dead unless you had a backpack. You wouldn’t be caught dead traveling without a backpack. Wheels on your luggage. Honestly, I don’t know why any portfolio wouldn’t have a good slug of these Return Stacked strategies, because it literally is having your diversification and giving up nothing.

[01:02:58]Rodrigo Gordillo: But a lot of it has to do structural, for structural reasons, right? Like, it’s the machine that feeds the advisors that are the gatekeepers to doing all of this. And I’m going to go back to medicine because I also want to do a public service announcement for those, anybody who was listening, something that I’ve gone down the rabbit hole recently on, and it’s, all the cardiovascular risk that we hear about has revolved around the bad cholesterol, right? The LDL-C, and that level is high, you got to measure it.

But 20 years ago we discovered, science discovered that in fact, there’s this one particular reading the Lp(a), a particle that is the most correlated to heart disease of any of the metrics. It has taken 20 years for that to filter up to the boards that make decisions whether they’re going to change the guidelines.

As far as from, this is just from a podcast, I don’t know for sure, but as far as I can tell, Canada is the only one that’s implemented this and actually put it in their guidelines, that we need to start looking for Lp(a), even though the lead lipidologists know about this, right? We still have to get through the U.S. We got to do the U.K.. We had it all. Every country is going to take their sweet time to do this. 20 years ago. We know this to be true from all this, everybody, every lipidologist you talk to, they know they’re going to do that, but the average M.D. does not know and is not required to know it.

So it’s not just the individuals at the top. It’s the machine that says leverage is bad. There’s no way we’re going to allow you to do that. Even though we know from the Nobel prize winning concept of the efficient frontier and the capital market line that we’ve, and we’ve always, we’ve known this since the fifties that it is a sound approach to investing.

So by the way, if you haven’t had your Lp(a) tested, get your Lp(a) tested. You need to take aggressive measures in order to fix it if…

[01:04:52]Adam Butler: I think Rodrigo may have left some of you feeling like he just listened to a podcast and now he’s an expert in lipids. This is, it’s like years of investigating this. So you just you said, I don’t know, I just listened to a podcast, but this is what I understand now. So I…

[01:05:08]Rodrigo Gordillo: … podcast that I meant is I didn’t know how many countries had applied it in their mandates yet, but yes, as Adam alludes to, I’ve been, this is my second passion. So anyway, that’s the one thing.

[01:05:19]Corey Hoffstein: Lipids are a very common second passion.

[01:05:21]Mike Philbrick: Yeah, lipidology.

[01:05:22]Rodrigo Gordillo: And if you do have a high Lp(a) get your will straight. Just kidding. You can do lots about it. You can do lots about it. There’s drugs coming down the pipe, but it is a good analogy, like, this is how long it takes, so the good news is that if you are willing and able to adapt it, to adapt to it right now, you have all the tools available to fix it, so if you’re, and also if you’re an advisor, there’s a lot of alpha there. I just keep telling people, when I started in this business I was a private wealth advisor, back in, when I was in my mid-twenties. I grew like gangbusters because I was telling this story and nobody else was, right?

So it’s just, if you can capture this magic in a bottle and talk about this concept, you’ll be the only one talking about this concept right now. And I, my personal experience was that everybody was like, no way. I’ve got to learn more. And it was just easy to take meetings, easy to get people on board, because once you take that red pill, it’s tough to go back. But they’re not hearing from anybody else. It’s something that is not only useful for the individuals that are going to receive the medicine, but also the practitioners of it, in terms of their own business revenues.

[01:06:30]Adam Butler: You know what? It’s just so easy. You know what I love? I love French fries. You know what I like more? French fries with ketchup. You know what I love? I love apple pie. You know what I like more? Apple pie and ice cream. You know what I love?

[01:06:45]Corey Hoffstein: I’m glad you didn’t say apple pie and American cheese.

[01:06:47]Rodrigo Gordillo: It’s a thing.

[01:06:48]Adam Butler: you know what I love?

[01:06:49]Mike Philbrick: I love that thing, by the way, I was hoping…

[01:06:51]Adam Butler: You know what I love more? Equities and trend following. It’s just so dead easy. It literally is like apple pie and ice cream or French fries and ketchup or, name 50 other things that are way better together.

[01:07:02]Corey Hoffstein: And there’s your…

[01:07:03]Mike Philbrick: So many things.

[01:07:04]Rodrigo Gordillo: That’s going to be a great YouTube short. It’s going to, it’s going to, what’s bad, it’s sad guys at that one…

[01:07:10]Adam Butler: I’ll be adding another video of all the other things that are better together as an appendix to this.

[01:07:14]Rodrigo Gordillo: We’re going to put this on the AI machine to pick which clips are going to go viral and you’re going to be number one. And out of all the discussions we’ve had today, that one is just going to go, I can guarantee you.

Just to wrap it up in terms of the business benefits of this to an advisor, I did, we did write a piece called The Key… No, that’s if you’re a financial advisor, You Got Lucky, or The Key… but there’s a few of them that we’ve done.

If you go to the website and you go to Practice Management, there’s a few key pieces that’ll allow you to think through. What it is to run a business, right? And what is the key risk metrics for that business? I’ve been telling a lot of advisors that whether you see it or not, the last 10 years of your growth has been mainly luck, right?

Not to take away from the hard work and effort it takes to bring in new clients and do the right thing, but a large component of your profit has come from the fact that you’ve been overweight the home country bias market, bonds and equities in one of the largest and best performing 60/40 Sharpe ratios of your career, right?

Now you just you have to recognize that’s happened. You got hit in 2022, and you’re like, oh my God, I got lucky. I didn’t even know it. I should have taken some money off the table. What do I do now? Luckily, you’re right back up there, right? It’s amazing how, what the recovery has been. It’s been great.

[01:08:42]Adam Butler: Damn it, should have doubled down.

[01:08:44]Rodrigo Gordillo: Should have doubled down. But the thing about these articles that we wrote under the Practice Management section is to address the fact that if you want to be, if you’re a business owner that has raw materials as part of your inputs to provide a good product, you want to minimize the amount of risks that you take on that raw material, and the only business that I know that doesn’t do that is the financial services industry.

If you’re a good manager, you’re a good advisor, you have good people skills, you’re good at bringing in new clients, your employees love you, you keep your costs down, you have a good margin, you should win the game based on those metrics, and not on what did the S&P 500 do yesterday.

And if you do an assessment of risks in your portfolio, that should be minimized as much as possible, right? That if there is a bear market, when it hurts to get hurt, right? When it is a bear market, when your clients are losing money, you’re losing money and your own portfolio is losing money at the same time.

Everything that matters. And that is not a well balanced business that is going to help you thrive across any scenario. You’re riding the train and it’s going to stop at some point. So I think, this area of the website focuses on how do you make sure that your success comes from all the things that I talked about before.

And not just a single market, right? So please do, if you’re a practitioner, take a look at those, see what you think. And let’s chat about it. Look, we’d love to get more feedback on the pieces that we’re writing. And you might even bring somebody on that has done it. There’s a couple of people that come to mind that can talk about the same things that we just discussed here and what it’s meant to their business, right?

Okay. So I think …

[01:10:25]Adam Butler: Peanut butter and jelly.

[01:10:26]Rodrigo Gordillo: … that?

[01:10:28]Corey Hoffstein: Peanut butter and jelly.

[01:10:31]Mike Philbrick: Stacked. Working out and steroids.

[01:10:35]Rodrigo Gordillo: Butler blanked out for the last five minutes and just came up with, I’ve been thinking about it. He’s got a pen. He’s writing down five different analogies.

[01:10:44]Mike Philbrick: Oh my goodness.

[01:10:46]Rodrigo Gordillo: Okay. I think we covered a lot of topics for this first episode. Gents, thank you so much. If anybody wants to reach us, all the information will be on the description of this video, or the podcast summaries. You can always go find more information on Returnstacked.com. Anything else that I missed guys? Any? No? Everybody knows …

[01:11:06]Adam Butler: No, but I think we need to homogenize the lighting for next time. Corey, you look like you’re in Hemingway’s bar, dude. Are we going to all be…

[01:11:15]Corey Hoffstein: So you all need to dial it, warm your lights up. You get such cold, crisp lights over there.

[01:11:20]Adam Butler: I agree. I’m actually dying here from the lights. I had to turn the fan on. I’m like, getting a tan from my leg.

[01:11:27]Rodrigo Gordillo: Sharp. Don’t listen to Corey. I’ve been bitching about the amount of shade that he gets on the right side of his face since the beginning, but I can’t do anything about it. You won’t do it.

[01:11:37]Corey Hoffstein: … got my rum bar right next to me. That’s the vibe I’m looking for.

[01:11:41]Rodrigo Gordillo: I love that little, what is it at the back there? Stack Returns.

[01:11:46]Corey Hoffstein: Returns.

[01:11:47]Rodrigo Gordillo: Nice. Excellent. All…

[01:11:48]Adam Butler: Subliminal. I like that.

[01:11:51]Rodrigo Gordillo: Thank you all for sticking by us and with us throughout this podcast. We’re going to try this once a month. And if you have any questions, you want to reach out to, every one of us is active on Twitter. That’s probably the fastest and easiest way to reach out. If you don’t have a Twitter account, then the information is on the description. Thanks again and signing off.

[01:12:09]Adam Butler: Hold on.

[01:12:09]Rodrigo Gordillo: Happy Stacking.

[01:12:10]Adam Butler: If we get 5,000 Likes on this, Philbrick’s going to get Stacked tattooed on his bicep.

[01:12:16]Rodrigo Gordillo: Yes.

[01:12:16]Adam Butler: That’s a guarantee.

[01:12:18]Rodrigo Gordillo: Likes? Amazing.

[01:12:20]Mike Philbrick: Okay. That’s interesting.

[01:12:22]Rodrigo Gordillo: Beautiful. Thanks all.

[01:12:23]Corey Hoffstein: Thanks everyone.

[01:12:23]Adam Butler: Thank you.

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