The Concept of Return Stacking with Corey Hoffstein
Nov 21, 2024
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Corey Hofstein, a quantitative investor and CEO of Newfound Research, shares his fascinating journey from video game development to finance, driven by passion and pivotal life moments. He discusses investing strategies like return stacking and highlights the transformation of risk management in today's markets. The conversation also tackles the evolution from mutual funds to ETFs, focusing on investor psychology and preferences. Additionally, Hofstein reflects on the explosive growth of crypto trading during the pandemic, offering insights on its impact on the financial landscape.
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The conversation showcases insights from Morris's new book, 'Tribal,' on leveraging cultural instincts for enhanced unity and cohesion in society.
Deep dives
The Transformative Power of Quantum Technology
Quantum technology is poised to be as transformative as AI, with the potential to revolutionize various industries. It leverages the principles of quantum mechanics to perform complex calculations at unprecedented speeds, enabling breakthroughs in fields such as drug discovery, cryptography, and climate modeling. For instance, quantum computers could significantly accelerate the process of simulating molecular interactions, possibly aiding in the development of new cancer treatments. By embracing this emerging technology, businesses can enhance their operational efficiency and unlock new opportunities.
Corey Hofstein's Unique Journey into Quantitative Investing
Corey Hofstein's entry into quantitative investing was unexpected, as he initially aspired to be a video game developer rather than a quant. With a background in computer science and computational finance, he transitioned into finance during a time when many peers sought traditional banking roles. His early experiences included creating quantitative models while still in college, leading to the foundation of his firm, Newfound Research. Hofstein's story exemplifies the non-linear paths people can take within the finance industry, highlighting the importance of adaptability and seizing opportunities.
The Importance of Understanding Risk in Investment Strategies
Investors must recognize the critical importance of understanding risk when developing investment strategies. Hofstein emphasizes that many investors often overestimate their ability to time the market or utilize complex trading strategies without fully grasping the associated risks. He advocates for a more cautious approach, suggesting that low-breadth bets can lead to significant losses and that seeking opportunities in less competitive areas can yield better results. Education and awareness are crucial in navigating the complexities of market dynamics successfully.
The Role of Portable Alpha and Return Stacking
Return stacking, an evolution of the portable alpha concept, aims to enhance investment portfolios by integrating diverse strategies without sacrificing core investments. This approach allows investors to gain exposure to alternative assets while maintaining their existing stock and bond allocations. By using derivatives, return stacking can potentially improve overall portfolio performance and risk management. This innovative investment strategy exemplifies the ongoing evolution in fund management practices, providing investors with more flexible solutions.
Navigating the Challenges of Market Structure and Microstructure
Hofstein's research delves into the complexities of market structure and microstructure that can significantly impact investment outcomes. For instance, understanding liquidity cascades helps investors identify potential vulnerabilities within the market that could exacerbate downturns. The rise of passive investing and its effect on price discovery are also critical areas of focus, illustrating how market dynamics evolve in response to changing investor behaviors. By analyzing these factors, investors can make more informed decisions and better anticipate market movements.
Building Resilience Through Behavioral Finance
Hofstein highlights the importance of behavioral finance in understanding investor decisions and market reactions. Panic-driven decisions often lead to poor outcomes, particularly during times of volatility. By fostering a deeper awareness of emotions and cognitive biases, investors can develop more resilient strategies that account for irrational behavior. This behavioral insight is especially valuable in the context of alternative investments, where emotional reactions can lead to significant performance gaps.
The Impact of Technology on Investment Strategies
The integration of technology, especially in the realm of quantitative and algorithmic trading, has transformed investment strategies considerably. Hofstein notes that advancements in computational finance enable more sophisticated analyses and the development of innovative fund strategies. Utilizing data science and machine learning techniques helps investors identify patterns and trends in vast datasets, enhancing decision-making processes. As technology continues to evolve, adapting to these changes will be critical for investors aiming to maintain a competitive edge.
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Barry Ritholtz speaks with Corey Hoffstein, CEO and CIO of Newfound Research. Corey pioneered the concept of 'return stacking' and is one of the masterminds behind the Return Stacked ETF Suite, which manages roughly $750 million across five ETFs. Corey's work has been published in the Journal of Indexing and the Journal of Alternative Investments. He is also the host of the popular podcast on quantitative investing "Flirting with Models." On this episode, Barry and Corey discuss the creation of Newfound Research, what it takes to launch an ETF, and how return stacking actually works.
