E1. Enter the New World of Return Stacking - Inaugural Episode!
May 1, 2024
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Corey Hoffstein, Rodrigo Gordillo, and Adam Butler discuss the challenges of beating the U.S. equities market, diversification for generating excess returns, risk parity, trend following, and the potential of stacking strategies in portfolios. The importance of diversification in ensuring investment success and the structural challenges in implementing return stacked strategies are also highlighted.
Diversification is crucial to overcome challenges in beating large-cap US equities market.
Shifting focus from risk management to creating excess returns can lead to investment success.
Trend following and risk parity strategies can enhance portfolio returns and mitigate losses.
Deep dives
Investing in Alternatives for Excess Returns
Large-cap US equities are challenging to outperform. The podcast discusses how investors can seek positive excess returns through alternative investments due to the efficiency of large-cap equities. By unshackling from traditional market constraints and focusing on macro inefficiencies, investors can aim for consistent excess returns instead of solely relying on stock picking. The conversation emphasizes the shift towards creating excess returns with a diversified approach and alternative beta strategies to navigate market uncertainties.
All Weather and All Terrain Investment Strategies
The podcast delves into the concept of all weather and all terrain investing models to navigate different market conditions effectively. By balancing the sensitivity of assets to changes in growth and inflation expectations, these strategies aim to create a diversified and balanced portfolio. Trend following is highlighted as a component that can respond to evolving market expectations and provide opportunities for potential outperformance by adapting to changing regimes. The discussion emphasizes the importance of designing portfolios with a mix of assets that behave differently across various economic scenarios for stability and long-term returns.
Enhancing Risk Parity with Complementary Strategies
Risk parity strategies, resembling a motor with three pistons of equities, sovereign bonds, and commodities, are discussed with the addition of trend following as a fourth piston for enhanced performance. The podcast explores how the inclusion of trend following can mitigate losses during periods when traditional asset classes experience downturns. By incorporating trend following, investors can potentially navigate challenging market environments where multiple asset classes decline simultaneously, providing a balanced approach to portfolio management and risk mitigation.
Risk Parity Principles in Investing
Investing traditionally assumes positive risk premiums in assets like equities, bonds, and commodities. However, risk parity principles challenge this assumption by acknowledging that not all assets have positive excess returns at all times. By diversifying and balancing a portfolio without relying solely on constantly positive risk premiums, historical data suggests a smoother and more profitable return trajectory. Applying these principles involves adjusting portfolio weightings based on expected risk premiums, incorporating considerations of an inverted yield curve or commodity term structures to guide investment decisions.
Glide Path Reimagined for Optimal Portfolio Allocation
The concept of a glide path for portfolio allocation has evolved to consider not only age but also wealth level and remaining expected years of life to optimize financial outcomes. By mapping out different financial scenarios and risk levels, varying investment strategies emerge, ranging from cash-heavy portfolios for secure wealth levels to more diversified mixes of stocks, bonds, and trend following for growth-oriented goals. Additionally, implementing the concept of stacking leverage in portfolios can enhance diversification benefits and increase the probability of achieving desired outcomes, highlighting the importance of adaptability and risk management in investment strategies.
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.
(0:00) Introduction and discussion on investment strategies
(2:03) Sponsor: Returnstack.com
(6:36) The challenges and constraints of active management in top-weighted markets
(14:18) Analysis of 20 years performance of large cap US funds and questioning the efficiency of large cap US equities
(18:30) Introduction to return stacking as a strategy to outperform benchmarks
(25:06) Discussion on the differences between stacking alternatives vs active stock picking and understanding active risk budget
(29:20) All-weather and all-terrain investing: Balancing optimality and insights into the development of all-terrain portfolios
(40:35) The role of trend in diversification, risk parity and all-terrain portfolios with real-world examples
(49:05) Discussing risk parity for long-term portfolios and global carry performance during equity bear markets
(1:00:38) The importance of diversification in return stack strategies and the structural challenges in adopting them
(1:06:44) The potential business benefits for advisors utilizing return stack strategies and reflections on market recovery
(1:11:02) Focus on success measures outside of market performance and potential future guests and discussion topics
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