Join John Reynolds, founder of Electric Bigger and cultural commentator, as he shares insights on Germany's upcoming snap election. The discussion delves into the country’s obsession with frugality, revealing how this 'fetish for fiscal restraint' shapes political decisions and economic policies. John highlights the ongoing crisis in the German automotive industry and the rise of extremist parties, while pondering how new leadership might shift Germany's approach to growth and investment. Will this election redefine Germany's role in Europe?
Diversification is the only free lunch for investors, and return stacking can optimize portfolio efficiency.
Liquidity cascades, influenced by central bank actions, passive investing, and volatility-contingent strategies, impact market dynamics.
Trend following strategies offer low correlation to traditional assets and could be explored for diversifying portfolios without trading options.
Deep dives
The Evolution of Corey Hofstein's Career
Corey Hofstein, the CIO of newfound research, discusses how his early passion for video games and computer science led him to a career in finance. He shares his journey from teaching himself programming languages to pursuing a master's degree in computational finance. Corey explains how he found his niche in the quant finance space, where he can marry his love for computer science with his interest in markets.
Return Stacking and Diversification
Corey Hofstein highlights the importance of diversification as the only free lunch for investors. He explores the challenges of introducing alternatives into portfolios and the funding problem associated with reallocating from stocks and bonds. Corey introduces the concept of return stacking, which focuses on capital efficiency and bringing diversifying alternatives into portfolios through capital-efficient strategies. He emphasizes the potential benefits of introducing alternatives through mutual funds and ETFs for wider accessibility.
Liquidity Cascades and Market Dynamics
Corey Hofstein delves into the concept of liquidity cascades and their impact on markets. He synthesizes ideas from various industry experts and highlights three key factors influencing market dynamics: central bank actions, the growth of passive investing and ETFs, and the proliferation of volatility-contingent strategies. Corey proposes a narrative that intertwines these factors, suggesting their interconnectedness and mutual influence on market behavior.
Leverage and Diversification: Unlocking Portfolio Potential
The concept of return stacking involves leveraging and diversifying a portfolio to optimize returns. By reallocating stocks and bonds with an ETF, investors can achieve the same core exposure while freeing up capital to invest in alternative assets. The goal is to introduce diversifying strategies that are statistically uncorrelated to the existing portfolio, such as managed futures. However, it is crucial to use leverage correctly and not double down on the same risks. While return stacking can increase terminal wealth through diversification, it does not eliminate risk but rather redistributes it across different market conditions.
Trend Following Strategies and the Pursuit of Uncommon Returns
Trend following strategies offer the potential for positive returns and low correlation to traditional assets like stocks and bonds. These strategies aim to profit from long-term trends by going long or short depending on price movements. On a risk-weighted basis, trend following strategies can resemble a risk parity portfolio. In addition to the exposure to global risk assets, the trading strategy itself resembles the delta replication strategy of a straddle. While trend following can provide participation in market upside and downside protection, it is important to assess whether it generates alpha or if returns come from trading strategies. Synthesizing option-like payoffs without trading options is an intriguing area for exploration in diversifying portfolios.
With an early passion for video games and teaching himself programming languages Q-Basic and C, Corey Hoffstein did not expect to ultimately wind up in money management. But exposure to various roles in the industry through an internship started him down the path, helping him see how to marry his love of computer science with markets.
Now the CIO of Newfound Research, a firm he co-founded more than a decade ago, Corey is focused on delivering to investors the one free lunch they are entitled to: diversification. We spend most of the discussion here, with an emphasis on “return stacking”, a strategy that Newfound embraces to expand access to diversifying assets. In this light, a topic we spend some time on is trend following, a strategy that has proven to deliver attractive low correlation to stock and bond returns.
Corey describes the manner in which the implementation of trend following is similar to the delta hedging of a long volatility position, allowing the strategy to provide some portfolio protection in risk-off events.
And with risk-off in mind, we talk as well about “liquidity cascades”, research that Corey and his team have done to highlight the manner in which trades that live and breathe within the market’s ecosystem of risk can create spill-over effects that amplify asset price movements.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Corey Hoffstein.
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