Episode 220

full
Published on:

16th Jan 2025

Return Stack Anything: Portable Alpha with RSSB

Finding alpha is notoriously difficult.

Instead of trying to pick stocks better, what if you simply added the return of high-conviction, alternative strategies on top of your asset allocation?

That’s the opportunity portable alpha unlocks for allocators.

Join us for an exclusive webinar where we reveal how capital-efficient ETFs can be used to “port” the returns of any alternative investment on top of your asset allocation.

In this educational session, we will:

  • Explain what portable alpha is, where it came from, and what problems it solves for allocators
  • Demonstrate how the Return Stacked® Global Stocks & Bonds ETF (RSSB) enables anyone to implement portable alpha
  • Discuss key considerations in running a portable alpha approach
  • Provide a live demonstration of how investors can evaluate different portable alpha ideas

Perfect For:

  • Investment professionals seeking to enhance their portfolio construction toolkit.
  • Advisors looking to provide better diversification solutions for their clients.
  • Advisors looking to introduce unique sources of alpha for their clients.
Transcript
Rodrigo Gordillo:

Okay.

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Well, thank you everybody.

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for joining us today.

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My name is Rodrigo Gordillo.

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I'm the president of Resolve

Asset Management Global and co

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founder and trading advisor of

the ReturnStack suite of ETFs.

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And I'm delighted today to be joined by

Corey Hofstein, CIO of Newfound Research,

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as well as co founder and portfolio

manager of the ReturnStack suite of ETFs.

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If you haven't heard of the ReturnStack

lineup before, Ultimately, what

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this suite aims to do is to unlock

the benefits of diversification.

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And this is done by allowing you

to introduce alternative investment

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strategies and exposures into your

portfolio without having to sacrifice

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your core stock and bond exposure.

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Now in the suite, Each ETF follows

the same simple formula, which is

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for every dollar invested, we're

going to provide a dollar of either

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a core stock or bond exposure, plus

an extra dollar to an alternative

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asset class or investment strategy.

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And we launched our first ETF in

February:

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suite just actually passed over four

hundred, eight hundred and forty million

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dollars, and hopefully rapidly toward

a billion by the end of the year.

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We only have a couple of weeks scoring.

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we're excited by that growth.

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Obviously, there's a demand for it.

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And today, uh, I'm actually quite

excited for Corey, uh, to specifically

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talk about the return stack global

stocks in bonds, ETF, that's RSSB.

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And he will have a chance to really

walk the audience through, through

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the many ways that one could utilize

this unique ETF to enhance portfolio

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diversification and really allow for all

types of unique stacking opportunities.

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And importantly here for this webinar

is that please do feel free to ask any

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questions along the way in the chat bot.

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You can just type it in.

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I'll do my best in responding real time

to you, or if I can kind of nudge Corey

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and ask him questions as he goes along.

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Um, so with that, Corey, I'm excited to

turn it over to you to do the deep dive.

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Corey Hoffstein: Well, thank you, Rodrigo.

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And thank you for that kind intro.

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I'm personally really excited

to talk about RSSB, the Return

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Stack Global Stocks and Bonds.

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I think at its face, it's probably our

most boring ETF that we have in the suite,

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but I actually think once you go under

the hood, it is our most powerful ETF.

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This, product allows you to

ultimately stack whatever you want.

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onto your portfolio.

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So whatever alternative investment class,

asset class or strategy, you can now turn

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that into an overlay on your portfolio.

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So really excited to talk about it.

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Before I get there though, I want to talk

about this concept of portable alpha.

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This was an institutional idea that was

very, very popular in the:

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me, in the, in the 2000s and then post

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except among a select few

institutions who really had a

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like extreme success using it.

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We actually just did a podcast with

the CIO of Delta's Pension, John

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Glidden, who had an unbelievable

turnaround at their pension.

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You can check out our Get Stacked

podcast, or we actually published a

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quick A case study on our website.

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You can check that out.

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That went live today talking about

how he used Portable Alpha to take

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a dramatically underfunded pension

and get it to an overfunded status.

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Really a great story and a great

success case of using Portable Alpha.

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Where I want to start with

is what is Portable Alpha?

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This term is coming back.

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We're seeing it a lot more in the news.

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If you haven't heard of it,

if you're unfamiliar with it,

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that's that's not a surprise.

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It really has been exclusively

an institutional concept.

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So I want to start with a quick

explanation of what it is, and more

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important than what it is, I want to

start with what problem is Portable

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Alpha ultimately trying to solve.

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And as you can probably guess from

the name, the Alpha part of the name,

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what Portable Alpha was originally

designed to solve was for allocators

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and professional investors who were

trying to beat their benchmark The

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portable alpha was effectively invented

as a new way to try to beat a benchmark

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in a more sophisticated manner.

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So I want to start with

this picture, right?

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Because this is actually, the story

goes back to the:

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They were actually the originators

of the portable alpha idea.

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It's a little fuzzy.

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I'll give them credit.

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There's a couple other

folks who take credit.

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But largely I think the story starts

with PIMCO in the:

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were running some bond mandates.

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Now this is a current breakdown of the U.

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S.

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aggregate bond index, but you

can guess that probably back in

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the 1980s, the total exposure to

treasuries wasn't too dissimilar.

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When we look at the U.

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S.

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aggregate bond index today,

there is a large slug of U.

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S.

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treasury exposure, and so if you're

trying to beat this benchmark as a bond

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manager, One of the choices you have

to make is am I going to touch that U.

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S.

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Treasury exposure or am I going to

take some off benchmark bets, right?

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Because there really isn't a

tremendous amount of security

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selection you can do within U.

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S.

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Treasuries.

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A 10 year U.

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S.

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Treasury is largely fungible

with any other 10 year U.

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S.

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Treasury.

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So if you have 10 year U.

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S.

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Treasury exposure in your benchmark,

How are you supposed to beat that unless

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you go maybe buy corporates or mortgage

backed securities and take some off,

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off benchmark bets in terms of how much

treasury exposure you're going to have?

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Well, in the early 1980s, some very

sophisticated and thoughtful investors

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at PIMCO said, well, what if we, what if

we did something a little bit different?

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What if instead of buying U.

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S.

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treasuries with our cash, we buy U.

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S.

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treasury futures?

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Now, U.

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S.

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Treasury futures are going to

give us the total return of U.

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S.

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Treasuries, but does

so in a levered manner.

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So we only have to put up a little

bit of capital to get that exposure.

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The return of those U.

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S.

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Treasury futures is in effect

going to be the return of U.

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S.

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Treasuries minus that cost of leverage.

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And then we're going to have a

whole bunch of cash left over with

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which we can invest however we want.

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To make this, if you don't know futures,

sort of the simple way to think about

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this is, let's say you wanted to buy

a house, a million dollar house, and

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you have a million dollars in cash.

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Well, one choice is you

can just buy the house.

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In this case, that would just

be like equivalent to just

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buying the treasury bond.

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Or you could go to a bank and get

a mortgage, maybe put 200, 000

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down, get an 800, 000 mortgage.

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You then get the return of the house minus

the cost of financing with your mortgage,

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and you have 800, 000 of cash left over.

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Now, then the question becomes,

what do you do with that cash?

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And that's where PIMCO said,

well, we can invest that cash to

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outperform our cost of financing.

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In our analogy, say, the cost of

the mortgage interest that you're

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paying, well then you have effectively

added return on top of that

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original thing you're investing in.

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For PIMCO it was the treasuries,

in our case it's the house.

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And so that's a very powerful concept

because it unlocks sort of that

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beta you're getting, the treasuries,

versus how you are able to add

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something on top by thoughtfully

using some leverage and financing.

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Now what's important about using treasury

futures is that historically like if you

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go look at mortgage rates today The actual

financing costs of mortgages can be quite

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high, and a significant spread above,

say, the equivalent, uh, duration for U.

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S.

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Treasury, right?

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You're gonna borrow at a

much higher rate than the U.

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S.

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government is.

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But if you look at the embedded

cost of financing inside of Treasury

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futures, it's historically been

a lot closer to T bill rates.

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So what I have in this graph is

going back the last five years.

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I've plotted the three

month LIBOR rate or SOFR.

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It sort of starts LIBOR and SOFR.

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Uh, the black line is your three

month T bill rate and the green

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line is the embedded cost of

financing inside of a 10 year U.

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S.

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Treasury futures contract.

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And what you can see is that

green line has historically, while

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not perfectly fit, Very closely

danced around that black line.

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And so what we can say is if we're

using something like us treasury

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futures to replicate treasuries,

we're actually getting that

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treasury return minus e bills.

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And that's a, one of the lowest costs

of financing you can get, right?

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That is the short term borrowing

rate of the us government.

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And we're effectively able to tap

into that through the futures market.

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The reason that's powerful and what

PIMCO did and what became known

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as their bonds plus strategy is

they said, okay, let's replace our

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treasuries with these treasury futures.

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We're going to put a little

cash aside for margin, right?

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We need that.

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That's sort of like a down

payment for the house.

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That's how we're managing these treasury

futures as they move up and down.

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Now those treasury futures are going

to have Um, a financing cost equal to

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T bills, but what if we take that cash

that's left over and invest it in short

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term, slightly worse credit quality, maybe

some stuff with some embedded optionality

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like mortgage backed securities, things

that we think are close to cash, cash

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like in terms of risk, but slightly

riskier to earn a slightly higher return.

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And if we can earn that slightly

higher return above the financing

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rate, we've effectively stacked that

return on top of our bonds, right?

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And so they were able to take their

security selection advantage in short term

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bonds to outperform cash and then stack

that excess return on top of treasuries.

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And that's how they were able to

basically create alpha in that big

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slug of treasuries that they had

that otherwise there was really

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no security selection opportunity.

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Now, a couple of years after this,

they realized this didn't have to

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simply be done in the world of bonds.

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They could take the same

idea and do it in U.

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S.

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equities.

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I think it was 1985 or 1986 that the U.

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S., uh, that the S& P 500

futures started trading.

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And what PIMCO realized is they said,

look, our advantage is in picking bonds.

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We don't think we can pick stocks.

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But what if we simply said we're

going to buy S& P 500 futures

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to get S& P 500 exposure?

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We're going to put some cash aside as

margin, and then we'll use the rest of

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the portfolio to invest in short term,

you know, high quality corporates, maybe

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some embedded optionality with some

mortgages, again, some, some cash like

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instruments that take on a little bit

more risk and by outperforming cash, the

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cost of financing in those S& P futures,

we can create what looks like alpha.

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And right.

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And so this concept of portable

alpha is born because what they're

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doing is generating returns in bonds.

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And stacking that on top of stocks, right?

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So the, where they're generating the

excess returns has now been unlocked

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from the underlying asset, the beta

that most investors are buying for.

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And this became known as PIMCO's

Stocks Plus program and has been

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running since the mid 1980s, uh,

with great popularity, right?

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Because again, the idea is you can get

your S& P 500 exposure, but you don't need

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to pick stocks better to beat the market.

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Hempco is able to say, no, we think

we can pick bonds better and we're

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going to take that ability and stack

it on top of the equity beta you want.

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So it's a profoundly powerful

construct that they unlock.

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And this is something that in the early

:

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of institutions who said, well, we don't

just have to pick bonds with that cash.

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We can do whatever we want.

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And that's where things really started

to see, well, we can take our betas,

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whether it's stocks or bonds and stack

on all sorts of hedge fund strategies.

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What we, when we take a step

back and say, well, what does

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this really unlock for investors?

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What we think this unlocks is

what we call the funding problem

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of alternative strategies.

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This idea that if you are traditionally

benchmarking to a portfolio of stocks and

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bonds and you want to add alternatives

to your portfolio, you typically

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have to sell those stocks and bonds

to make room for those alternatives.

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So your classic 60 percent stocks, 40

percent bonds becomes say a 50, 30, 20.

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The problem with this approach is

that by selling stocks and bonds

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to make room for your alternatives,

you create a hurdle rate problem.

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A hurdle rate both in the rate of

return that those alternatives have

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to have and hopefully outperform to be

additive to the portfolio, but also a

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behavioral hurdle rate in our experience.

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Stocks and bonds tend to be

much more transparent to end

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investors and stakeholders.

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Alternatives tend to be higher cost,

less tax efficient, less transparent, and

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just behaviorally harder for investors

to stick with over the long run to reap

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the benefits of the diversification

that they bring to the portfolio.

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This new world approach of Portable

Alpha, again, not really new world,

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it's been around for 40 years, but

is being reintroduced now, allows

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us to say, let's keep the 60 40 and

let's stack those alternatives on top.

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So let's keep that core benchmark.

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And use our active risk budget

to add these alternatives on top.

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And again, we think this really solves

that funding problem because no longer

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do you need to outperform the stocks

and bonds you sold, you simply need

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to outperform your financing rate.

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And if you're thoughtful as to how

you're constructing this stacking, that

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financing rate can be as low as T bills.

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And what this then allows us to

do is say, well, we can be really

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thoughtful about where we are using

our active risk budget, right?

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If we are benchmarking to some

passive 60 40 portfolio and we choose

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to be active, does it make sense

to be active in picking stocks?

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Well, we've all seen the SPIVA report,

for example, that would tell you over

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the last 15 years, Only 10 percent

of large cap managers have actually

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beat their benchmark after costs.

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It's a very hard thing to do, and it takes

an exceptional amount of skill to identify

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those managers and stick with them over

that period to reap those benefits.

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And even if you do, sort of the average

alpha they generate isn't that great.

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So on the, on the left side here, what

we have is what the return would have

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looked like in a decomposed fashion.

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If you had managed to

pick a top four tile U.

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S.

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large cap equity manager over

the:

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So the prior decade, and

what you would see is that.

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You would have earned a 12.

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84 percent annualized return, about 120

dips of which would have come from manager

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alpha, the vast majority of which would

have come from underlying beta in U.

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S.

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large caps.

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Consider the new world approach, which

says, well, instead of trying to find

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alpha in the place that's proven to be

one of the hardest to find alpha, what if

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we just buy our beta, right, and stack on

top, in this case some hedge fund beta.

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So just basically chose a generic

hedge fund benchmark, didn't even

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have any skill, didn't try to do any

hedge fund selection, just said just

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give me broad hedge fund exposure,

stack that on top, get rid of the

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financing rate, the cost of cash, and

you would have added 275 basis points.

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So really no skill needed there in terms

of manager selection, and you would have

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more than doubled the excess returns

you would have added to your portfolio.

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So again, what we think is a truly

profoundly, uh, important unlock for

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the way we think about spending that

active risk budget for investors

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in the pursuit of outperformance.

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And when you use this framework,

really what it allows you to do is

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think of any alternative investment

strategy or asset class as sort

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of these Lego building blocks.

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When we look at the long term returns,

if we cut out the cash component, if

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we say what are, what's the excess

component of these different asset

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classes, whether it's gold or trend

following or market neutral, long,

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short or event driven strategies.

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If we subtract out that T bill rate,

whatever's left over would have been

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effectively what we can think about

stacking on top of our betas, right?

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And the, and again, we can mix and

match these to whatever objective

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or outcome we're looking for.

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So we could say, well, instead of trying

to pick stocks, why don't we just buy

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the S& P 500 and stack some gold on top?

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Or we could stack some trend following

or some macro or some equity long short.

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Again, in whatever combination we want

that creates an outcome that we want.

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Maybe it's, we want absolute

returns, uh, low vol alpha,

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excess returns, or maybe we want.

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some sort of stack that we think is going

to provide profound diversification in

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certain sort of market environments,

high inflation environments, or,

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uh, a breakdown of fiat, right?

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You could think about stacking a

little bit of gold and Bitcoin.

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There's all sorts of creative things you

can do when you unlock this framework.

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Question is then, how

do you do this, right?

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Because I mentioned at the very beginning,

the way PIMCO did this is they bought.

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U.

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S.

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Treasury futures.

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And then they bought S& P 500 futures

and most allocators don't have the

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ability to do that themselves, either

because their mandate prohibits it,

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or they don't have the ability to

do it on behalf of their clients.

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And that's where RSSB comes in.

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And that's why we think RSSB is

such an exciting product because

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it allows you to unlock this return

stacking and portable alpha concept.

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By simply using an ETF.

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So RSSB, when you give us a dollar, we

are going to give you a dollar of global

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equity exposure and a dollar of U.

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S.

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Treasury exposure.

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And the way we do that is very simple.

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You give us a dollar and we're

going to put 90 cents in, or

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effectively 90 cents, in passive.

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low cost equity exposure.

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We're basically trying to give you

something as close to call it MSCI Acqui

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or FTSE Global All Cap type exposure.

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No active bets being

made on the equity side.

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Every dollar, 90 cents is going into that.

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And then we're going to put

10 cents in basically T bills.

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And those T bills are going to

serve as collateral for us to buy

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10 cents of equity futures to help

us fill out the rest of that dollar.

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as well as a dollar of

treasury future exposure.

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It's going to be a ladder of

two, five, ten, and long bond U.

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S.

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treasuries equally weighted,

so 25 percent in each.

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When you take that exposure combined,

what we're getting is a dollar of equities

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plus a dollar of treasuries, and those

treasury futures are going to include

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that cost of financing, and which is we've

seen is historically close to T bills.

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And so this tool then is is

a tool of capital efficiency.

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You're getting two dollars of

exposure for every dollar you invest.

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Now the way most people have, would have

historically looked at a fund like this

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would have been as a standalone, right?

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They would have said, well what have

global stocks done historically?

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What have bonds done historically?

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What happens if you look at something

where you stack them on top of

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each other and pay, you know, a

financing rate equal to T bills?

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Black line global stocks, blue line bonds,

green line would have been if you stack

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them together and pay the financing rate.

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And what I would argue is

this is the complete wrong

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way to look at this product.

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Because this product is not

meant to say buy this instead of

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global equities and you're going

to outperform over the long run.

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What this product is meant to

do is help you free up capital

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in your portfolio to then use to

stack other concepts and ideas.

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So in my opinion, this is a much better

way to think about a product like this.

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That if I put 50 cents into a product

like this and 50 cents in T bills,

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that return is going to look almost

equivalent to 50 percent global

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stock, 50 percent bond portfolio.

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Right?

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The black line, the green line match here.

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And that's important because that 50, 50

percent in a product like RSSB, Giving

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you returns that look like a dollar

in a 50 50 means that the rest of that

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portfolio, the other 50 cents in T bills,

can then be used to invest in whatever

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you want, and that will effectively

be stacked on that original 50 50.

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Now most people don't have a 50 50,

they have a 60 40 or a 70 30, so, and

369

:

most people aren't going to want a

huge stack anyway, they might want a

370

:

10 percent stack or a 20 percent stack.

371

:

So the way we think about using

this is, for whatever stack size

372

:

you want, you basically need to

sell enough stocks and bonds.

373

:

And then get the exposure back

with RSSB to create the room for

374

:

whatever alternative stack you want.

375

:

So let's say you have a 60 40, 60 percent

stocks, 40 percent bonds, and you wanted

376

:

a 20 percent stack of alternatives.

377

:

Well, what you could do is you

could sell 20 percent of your

378

:

stocks, sell 20 percent of your

bonds, and put 20 percent into RSSB.

379

:

Now, remember, RSSB is going to give

you a dollar of stocks and a dollar

380

:

of bonds for every dollar you invest.

381

:

So that 20 percent in RSSB is

going to give you back 20 percent

382

:

stocks and 20 percent bonds.

383

:

And then you have left over 20

percent of your portfolio with which

384

:

you can invest in alternatives.

385

:

And when you take the stocks and bonds

and RSSB and add the exposure together,

386

:

Through an x ray, you get your 60 40 back,

and the other things you're investing in,

387

:

those alternative investment strategies or

asset classes, are now effectively stacked

388

:

on top, at the financing rate, embedded in

the leverage that we manage within RSSB,

389

:

again, using the treasury futures that

get you a financing rate close to T bills.

390

:

And that's why, if we go back to

a graph like this, we would see

391

:

that the T bill rate, When you

invest the 100 100 portfolio, plus

392

:

T bills, gets you something that

looks almost identical to the 50 50.

393

:

Because those treasury futures have

historically had an embedded financing

394

:

rate almost equivalent to T bills.

395

:

Incredibly powerful way to borrow.

396

:

So then, the question is,

okay, what do you stack?

397

:

And there's really, sort of, it's

an open ended conversation here.

398

:

We have some biases as to what

we think you should stack.

399

:

We have a strong bias that whatever

you're stacking, ideally is, has

400

:

low correlation to stocks and bonds.

401

:

That's where we can go back to what

Rodrigo said at the beginning, that

402

:

return stacking is all about unlocking

the benefits of diversification.

403

:

But we recognize some people may

want to stack for outperformance.

404

:

Some people may want to stack for

diversification and downside protection.

405

:

And some people might have more specific

outcomes in mind, like they want to

406

:

stack some sort of fiat hedge, right?

407

:

So when you're stacking for

outperformance, You might think

408

:

of all these style premia, these,

these long short equity strategies,

409

:

these event driven strategies like

merger arb or, or SPAC arb, uh,

410

:

market risk transfer strategies or

some alternative lending strategies.

411

:

In stacking for diversification, you might

think of things like trend following,

412

:

or carry, or systematic macro, or even

sort of defensive equity long short,

413

:

quality long short, anti beta long short.

414

:

Those sort of things can be stacked on

top of your portfolio as pseudo hedges.

415

:

If you're stacking some sort of

fiat hedge because you're concerned

416

:

about the currency in which you're

investing in, well, you could try

417

:

to stack some gold or bitcoin.

418

:

Again, the combinations

are sort of endless.

419

:

RSSB is just the vehicle

that allows you to do it.

420

:

Question that comes up is,

okay, RSSB allows you to do it.

421

:

What should we do?

422

:

How big a stack size should we create?

423

:

How much of this is that stack

going to impact my portfolio?

424

:

What's it going to do to the

volatility of my portfolio?

425

:

These are questions that

come up all the time.

426

:

And this is where I wanted to

take the bold step of trying to do

427

:

some sort of live demonstration.

428

:

Um, We do have some tools that are

available to financial professionals

429

:

and advisors through our website.

430

:

If you go to returnstack.

431

:

com and go to the tools section we

have some, pretty easy to use Excel

432

:

tools that allow you to explore this.

433

:

But I recognize while we're prohibited

from giving that to anyone but

434

:

investment professionals, um, there

are other ways in which you can try

435

:

to explore these concepts on your own.

436

:

And so

437

:

Rodrigo Gordillo: So, Corey,

why don't we, why don't we

438

:

just, there's a few questions,

broad questions about the, well,

439

:

Corey Hoffstein: let me, let

me just sort of finish the last

440

:

point of the presentation here.

441

:

and then we'll, we can

do some, some Q and A.

442

:

to end things.

443

:

So, so the final point here for us

when it's at, at ReturnStack Portfolio

444

:

Solutions and ReturnStack ETFs is

all about when you're talking about

445

:

trying to It's a question of what

do you have greater conviction in?

446

:

The traditional approach to beating

the market is security selection.

447

:

And, and we've all seen the

SPIVA reports and the Morningstar

448

:

Barometer, Active Passive Barometer.

449

:

It is incredibly hard to beat the

market through security selection,

450

:

especially when you're in an environment

like we are today, where large cap U.

451

:

S.

452

:

equities absolutely dominate the market.

453

:

The market cap, and if you're

a global investor, 60 percent

454

:

of your money is in U.

455

:

S.

456

:

equities, and the vast

majority of that is in U.

457

:

S.

458

:

large cap, where alpha is very,

very hard to find historically.

459

:

Our question is, are your energies

better spent thinking through portfolio

460

:

construction and saying, let me just

take the passive beta, and then try

461

:

to stack things on top that we simply

have a higher conviction that that

462

:

combination of whatever we stack

is just going to outperform cash.

463

:

Doesn't even have to be alpha, right?

464

:

Your portfolio is truly indifferent

between what is alpha and what

465

:

is a new novel beta that you've

never had exposure to before.

466

:

Your portfolio is not going

to know the difference.

467

:

And so stacking new novel betas.

468

:

Can be just as, if not more powerful than

spending your energies looking for manager

469

:

selection and stock selection outbound.

470

:

And so that is the question

that we leave everyone with.

471

:

We know where we sit, right?

472

:

We clearly sit on the side that we

think stacking is a profoundly powerful

473

:

concept and should be utilized by all.

474

:

Um, and we think RSSB is the tool

that really unlocks the ability for

475

:

people to stack whatever they want.

476

:

So with that, Rod,

477

:

Rodrigo Gordillo: questions?

478

:

Great stuff.

479

:

Great job, Corey.

480

:

yeah, some questions here about

the construction of the ETF itself.

481

:

Uh, can you talk a little bit

about the longer average duration

482

:

of the bonds in RSSB versus AG?

483

:

RSSB's duration is longer than AG, right?

484

:

Um, so what's rationally

behind the choice?

485

:

Corey Hoffstein: Yeah, so we go with

a very simple futures ladder here.

486

:

Um, when you go and look at AG.

487

:

The composition of ag includes a lot

of mortgage backed securities, which

488

:

have, right, an embedded optionality

in them that makes the duration sort

489

:

of, uh, change quickly, depending

on how that option gets triggered.

490

:

So we opted for a very simple 25 percent

2 year, 5 year, 10 year long bond ladder.

491

:

the duration, I believe, is slightly

higher than where it is Ag today, but

492

:

not, not meaningfully, not, not several

points higher, probably within a, I

493

:

think it's within, uh, half a point.

494

:

So, it is going to be a little bit

different, but we do find that that

495

:

ladder, that equal weight ladder,

actually has done a pretty good job

496

:

approximating Ag without doing anything

complicated, just doing equal weight

497

:

2, 5, 10, and long bond approximating

Ag, over the last 15 20 years.

498

:

And a better job when you get

out of Ag and look at just a

499

:

diversified treasury bucket.

500

:

So if you look at GOVT, for example, which

is an index of all the US treasuries,

501

:

it actually gets you pretty darn close.

502

:

The reality is you can use a

lot more complicated methods.

503

:

Um, but when you look under ag, right,

you have durations and optionality

504

:

and, and credit risks that just can't

be captured with four simple key, key

505

:

duration points, uh, with futures.

506

:

And so what we opted for was rather

than adding a tremendous amount of model

507

:

risk and trying to match the duration

and curvature and convexity perfectly,

508

:

sticking with the simple ladder seemed

to be a, uh, very robust approach.

509

:

Rodrigo Gordillo: Perfect.

510

:

Now, one question here is, wouldn't

it be more reasonable to have

511

:

launched with 50 percent global

equities, 50 percent global bonds,

512

:

instead of having an active bet on U.

513

:

S.

514

:

bonds?

515

:

Why did we make that design decision?

516

:

Corey Hoffstein: Yeah, so I can

answer that theoretically and

517

:

I can answer that practically.

518

:

Theoretically, When you talk about

going with global bonds, you have to

519

:

ask the question of whether you're

going to currency hedge those bonds.

520

:

Because if you don't currency

hedge those bonds, you are taking

521

:

much more of a currency bet than

you are an international bond bet.

522

:

The currencies tend to have much

more volatility than the bonds.

523

:

So you have to consider whether you're

going to currency hedge that or not.

524

:

And that's, that's not a

trivial design question.

525

:

Practically, when I talk about being a U.

526

:

S.

527

:

allocator, U.

528

:

S.

529

:

investors really predominantly

only invest in U.

530

:

S.

531

:

bonds.

532

:

And so when we talk about,

unfortunately, just being a U.

533

:

S.

534

:

based firm, predominantly selling to U.

535

:

S.

536

:

based allocators, the beta

they need to be replicated in a

537

:

structure like RSSB tends to be U.

538

:

S.

539

:

bonds, not global bonds.

540

:

Uh, I would say 99 percent of the

portfolios I evaluate includes

541

:

zero international bond exposure.

542

:

Rodrigo Gordillo: I agree with that.

543

:

Corey, so what's one of the other

questions is what is kind of the stacking

544

:

advantages or disadvantages of using

RSSB versus some of our other stacks?

545

:

maybe we can talk about the size of

stacking available between one and

546

:

the other, and then the obvious.

547

:

Corey Hoffstein: Yeah, so RSSB is

going to give you the flexibility

548

:

to stack whatever you want.

549

:

So that is the advantage to RSSB, right?

550

:

Um, you can, whether you like the

way we do alts or not, or maybe we,

551

:

there's an alternative strategy that

we don't offer yet that you want to

552

:

include, RSSB allows you to do it.

553

:

But the downside to RSSB is the

maximum stack you can create

554

:

in your portfolio is 50%.

555

:

And that assumes you put 50 percent

of your portfolio into RSSB.

556

:

Okay.

557

:

which then assumes you want a 50 50

base and then you're doing a 50 50

558

:

plus up to 50 percent alternatives.

559

:

So there's a there's an inherent limit

as to how much you can stack with RSSB

560

:

because you're only getting two dollars

of exposure for every dollar you invest.

561

:

Whereas the other products in our suite

which are pre stacked alternatives are

562

:

giving you a dollar of either stocks or

bonds depending on the ETF plus a dollar

563

:

of that alternative and so you can in

theory have up to a 100 percent stack.

564

:

The trade off is being, you are accepting

our approach to doing those alternatives.

565

:

Um, and I understand that there

may be alternatives that we don't

566

:

offer yet that you may want, or you

may prefer another, uh, manager's

567

:

approach to certain alternatives.

568

:

And so the trade off is really

the flexibility versus how much

569

:

of a stack size you can create.

570

:

Rodrigo Gordillo: Any

thoughts on a line item risk?

571

:

Corey Hoffstein: Yeah, this

is one that comes up a lot.

572

:

This is sort of the practical

reality of investing.

573

:

What we find is for most people, a

stack of 10 percent isn't going to

574

:

move the needle in their portfolio.

575

:

They sort of need a stack of about 20

percent and 20 percent of things that

576

:

are, you know, a vol of, of, 10%, right?

577

:

So you're talking 20 percent

of managed futures and gold

578

:

and all that sort of stuff.

579

:

but if you were to do all that

with just a single fund, right?

580

:

Let's say you were to buy our

RSST fund, which is every dollar

581

:

you give us a dollar of U.

582

:

S.

583

:

equity plus a dollar of managed futures.

584

:

That fund has a volatility of 19%.

585

:

And so if you put 20 percent into

that, it's just going to stick out to

586

:

your stakeholders or end investors,

hopefully both in a good way, right?

587

:

And, you know, from time to time,

it's probably going to have a

588

:

higher average per year drawdown.

589

:

We hope the max drawdown is less than

just something like equities, but we

590

:

think on average it's just higher vol.

591

:

It's higher average annual drawdown.

592

:

And so that product is going to stick out.

593

:

And so what we advocate for is actually,

if you're going to take this stacked

594

:

approach, you really probably don't

want any individual product to be

595

:

more than five, maybe at most 10%.

596

:

Because otherwise it's going to

start to stick out in your quarterly

597

:

reviews and going to create that

behavioral friction as well.

598

:

And so there's a trade off here of,

you know, how do you achieve the

599

:

stack size you want versus how many,

you know, products do you need to mix

600

:

and match to make sure that none of

them stand out too much in doing so.

601

:

Rodrigo Gordillo: And can I

add something there as well?

602

:

I think one of the key considerations

as you assess whether you want a

603

:

standalone alternative as part of your

RSSB plus alternative portfolio versus

604

:

a prepackaged, you know, stocks plus

alternative in a single solution, there's

605

:

also the flip side of that, right,

Corey, from a behavioral perspective,

606

:

where the line item risk, um, when

you're seeing a 20 percent allocation

607

:

of a strategy, as we showed earlier

from:

608

:

Versus one that's prepackaged

that makes the returns of the S&

609

:

P and zero returns on the stack.

610

:

You know, there's also some play there

in terms of whether, you know, line

611

:

item risk is important to you and your

clients, um, to consider with all of

612

:

these types of stacking alternatives.

613

:

All right, I think we're

at the top of the hour now.

614

:

Uh, I'd like to thank you, Corey,

for a fantastic presentation.

615

:

You're already getting a lot of

comments here, uh, saying that it was an

616

:

outstanding presentation, and I agree.

617

:

For everybody here that, um, that

wants to learn more about what we're

618

:

doing, The return Stack is all about.

619

:

Please do reach out to

us, uh, on the website.

620

:

You go to return stack.com/contact

us and you will be able to connect

621

:

with somebody from the team.

622

:

We are active participants

with our investor community and

623

:

help create better portfolios.

624

:

So if you want to

consultation, 50 minute chat.

625

:

We're available there for you on, uh, for

any advisor that wants to, to reach out.

626

:

And, um, as Corey alluded to some

of the other areas of education, if

627

:

you have a YouTube channel, Return

Stacked or YouTube channel, if you

628

:

look that up, we have the Get Stacked

Investment Podcast on returnstacked.

629

:

com.

630

:

If you go to the insights page,

we have a wide variety of articles

631

:

that really answer all the

questions that we've been asked.

632

:

We've tried to be thoughtful

about answering that.

633

:

We'll also be publishing a couple of

new, um, articles in the next couple

634

:

of weeks based on some of the new

stacks that are coming out, uh, that

635

:

I think people would find useful.

636

:

And, uh, finally we have a section

and we have the model portfolio

637

:

section and the tools base, the

section for advisors and that's free.

638

:

You just need to sign up.

639

:

And we need to verify that

you're an advisor and within 24

640

:

hours, you'll get access to it.

641

:

And again, happy to help you understand

all those, understand the tools and

642

:

see how those things could help.

643

:

Any parting thoughts?

644

:

Anything else you want

to talk about, Corey?

645

:

Corey Hoffstein: No, thank you everyone

for tuning in, especially on the

646

:

East Coast during your lunch hour.

647

:

We appreciate you.

648

:

And if you have any questions,

uh, as Rod said, there's a variety

649

:

of ways you can contact us.

650

:

So please reach out.

651

:

Rodrigo Gordillo: Thanks everybody.

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About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.