Elevate Your Return Stacks with the Combined Power of Trend & Carry
Dec 9, 2024
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Rodrigo Gordillo, a seasoned Portfolio Manager and co-founder of Return Stacked ETFs, shares insights on maximizing investment returns. He discusses the synergy of trend following and carry strategies, revealing how their combination can create a resilient portfolio across varying market conditions. The conversation touches on the benefits of true diversification through managed futures and the predictive power of carry in forecasting returns. Gordillo also examines real-world applications and the advantages of finding balance in alternative investment strategies.
Combining trend following and carry strategies can significantly enhance portfolio performance by leveraging their complementary characteristics for better returns.
Managed futures provide genuine diversification benefits, particularly valuable during times of high equity and bond correlation spikes.
Utilizing return stacking techniques allows investors to optimize traditional asset allocations while improving returns without substantially elevating risk.
Deep dives
Understanding Trend and Carry Strategies
Trend-following strategies emphasize the price movements of assets, focusing on capital appreciation over time, while carry strategies prioritize the income generated from holding those assets, such as dividends or rental yields. Both strategies utilize recent price data and yield differentials to inform trading decisions. For instance, trend managers will analyze the historical price fluctuations of a commodity to determine whether to go long or short based on recent upward or downward movement. In contrast, carry managers evaluate the expected yield from holding an asset, aiming to benefit from its appreciation over time, regardless of price changes.
The Importance of Futures Market Understanding
An understanding of futures prices and their term structures is critical for both trend and carry strategies, as it influences trading decisions significantly. For trend managers, analyzing the front month contract is sufficient, as they focus on the most recent price shifts. Carry managers, however, consider the entire term structure, as they need to understand the yield dynamics across different expiration dates. For example, if storage costs or geopolitical events create variances in futures pricing, it impacts decisions on whether to hold or sell an asset, demonstrating the necessity of grasping these market mechanics.
Diversity in Asset Allocation
Both trend and carry strategies are characterized by their extensive diversification across a variety of asset classes, including currencies, commodities, equities, and bonds. This diversification helps mitigate risk by providing exposure to different economic stimuli and market conditions, leading to potentially more stable returns. For example, while a currency carry trade may falter due to economic instability, investments in commodity carries could still generate profits. Such a broad approach allows managers to navigate various financial landscapes and enhances their likelihood of achieving favorable outcomes in the long run.
Navigating Market Conditions
Trend and carry strategies maintain effectiveness even during challenging market conditions, though their performance may differ based on prevailing factors. For instance, trend managers may excel during market downturns by capitalizing on price declines, providing a form of crisis alpha. In contrast, carry strategies might come under pressure if there are unexpected shifts in interest rates or economic stability, as seen with the Bank of Japan's rate hikes. However, diversifying within carry strategies helps absorb losses from disfavored trades, reinforcing their ongoing relevance as components of a balanced investment approach.
Innovative Portfolio Construction with Return Stacking
Return stacking presents a novel approach to integrating trend and carry strategies within an investor's portfolio, enhancing potential returns without proportionately increasing risk. By utilizing derivatives like futures to leverage existing assets, investors can create a more optimized allocation that preserves their traditional equity and bond holdings while enhancing returns. For example, a mixed portfolio could include a 60-40 split of equities to bonds while adding a 25% exposure to managed futures strategies using margin. This layering not only broadens the return profile but also helps mitigate traditional market downturns, allowing for a smoother investment trajectory.
In today's complex market environment, finding genuine diversification and consistent returns has become increasingly challenging. What if you could harness two of the least correlated strategies to traditional portfolios available to investors today?
Join us for an exclusive webinar where Rodrigo Gordillo, Portfolio Manager and co-founder of Return Stacked ETFs, reveals how combining trend following and carry strategies as stacks may create a whole that is much greater than the sum of their parts.
In this educational session, we will explore:
The Fundamental Drivers - behind trend following and carry strategies - understand why these strategies work and how they can enhance your portfolio's performance
Beyond Traditional Diversification - learn how managed futures can provide true diversification benefits when equity and bond correlations spike
The Golden Combination - explore why the synergy between trend and carry strategies creates a more resilient portfolio across different market regimes
Real-World Applications - examine historical analogues and practical implementation strategies for your investment approach
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