The Concept of Return Stacking with Corey Hoffstein

28:23In other words, you're using the underlying 60-40 as a basis for borrowing in order to add a different asset class on top. Yeah, I think that actually the easiest way for most people to understand this without getting into the the world of derivatives like futures and swaps is to think about buying a house. Let's save a million dollars and you want to buy a million dollar house. There's really two ways you can do that. You can just go buy the house for cash. And then over time, your return is just equal to the return of the house. Or you can go to the bank and get a mortgage, put$200 ,000 down, get an$800 ,000 mortgage.

28:58you're going to get the return of the house minus whatever the cost of financing is and then you're going to have$800 ,000 in cash with which you can do whatever. If you were to take that$800 ,000 in cash and invest it in, say, mortgage-backed securities you'd probably offset your cost of financing and your return there would be equal to your return of just buying the house, ignoring taxes. But if I were to take that$800 ,000 and invest it in, say, gold Well, now my return is going to be equal to the return of the house minus the mortgage plus gold. I've effectively stacked the return of gold on top of my house.

29:38We do the same concept in institutional portfolio management in Portable Alpha, but instead of using a mortgage, you use derivatives like futures and swaps. And instead of replacing a house, you're replacing exposure like the S &P 500 or treasuries, where historically it's been really hard to beat the market. And so it's not worth putting capital at work there. So in other words, you're not owning the S &P 500. You're owning a derivative that gives you the right to purchase the S &P 500 at a specific price. That's a fraction of what owning all 500 stocks would cost. And then you take that money, that capital, and buy other diversifiers and theoretically other holdings that'll generate above market returns.

30:22Exactly. So you could say instead of buying a million dollars of the S &P 500, I'm going to take$50 ,000, use it as cash collateral to buy S &P 500 futures, a million dollars of S &P 500 futures, which will give me the total return. So that'll be equivalent. You'll get the same minus whatever the cost of the derivative. Minus whatever the cost of the derivative is, the embedded cost of financing. And then I can take the rest of that capital and invest it wherever I want. Now, you have to be careful here, right? This isn't a free lunch. You need to think about the operational risks. You need to think about the diversification.

30:54This is implicitly leverage. Leverage is a tool that accentuates both the good and the bad. We want to accentuate the benefits of diversification, not double down on the same risks. My immediate thought was, hey, why can't I take that derivative and go, all right, if it's going to cost me 50K, why can't I go 2X or 3X or 4X? And people do that, right? Which is great until it's not. Which is great until it's not, right? And so for us, when we think about these concepts of portable alpha and return stacking, we think they're incredibly efficient ways to get diversification into your portfolio, to get alternative return streams that can both enhance returns and potentially reduce risk.

31:37But you need to be really careful about what you're introducing, particularly because during a liquidity crisis, you tend to see correlations go to one and you need to be aware of the leverage risk that's embedded. So 0809, that sort of portable alpha probably didn't do great. Yeah, so let's talk about 0809. And let's talk about why we don't call this portable alpha and why we've rebranded it as return stacking. This concept goes back to the 1980s with PIMCO and got really popular in the early 2000s. What institutions realized is they said, I mean, you know these stats like the back of your hand.

32:13It is really hard to beat the S &P 500. If I have a bond benchmark and 40 % of that is treasuries, what am I supposed to do with all that dead asset? Well, what I can do is I can use derivatives to get that exposure, either the S &P 500 or those treasuries. And then I'll use my freed up cash and I'm going to go invest in some hedge fund that I think is going to give me uncorrelated alpha. Maybe the hedge fund does relative value volatility trading. Something with some sizzle, right? Right. Right. And what's interesting is when you think about it, what the math does is I say, okay, I'm getting the S &P 500 beta and I'm stacking the return of this hedge fund on top.

32:51And now I can sort of, that's why it's called portable alpha. I can port the alpha of this hedge fund on top of the S &P 500 instead of fishing in the same pond as everyone else. But what happens during a crisis? Everybody has to raise capital because anyone with leverage is starting to get margin calls. Right. You have four big problems that happened in 2008. Your first problem is if you were stacking this stuff, porting it on top of the S &P 500, and the S &P 500 lost 50 % from 2007 to the bottom in 2009. 56 and change. 56 and change. And you only posted 5%, 10 % as collateral. See ya. You're getting a margin call.

33:31So you did better if you stacked it on bonds. Uh-huh. Not so well if you stacked it on equities. So there's one problem. Folks who stacked it on equities were getting margin calls. Well, what do you do when you get a margin call? You rebalance your portfolio, basically. That's what you have to do. So all the institutions went to the hedge funds, and the hedge funds said, well, bad news. Not only have we lost money too, but we're gating redemptions. You can't have your money back. So all of a sudden they tried to rebalance to meet their margin calls, and what they had invested their cash in was not giving them their cash back.

34:05And nobody markets this as not portable alpha. Right. Right. And so they can't rebalance. They get the margin call. They lose the exposure to the beta. The last small wrinkle was a lot of this wasn't done with exchange traded futures. It was done with total return swaps with banks. And if your counterparty was Lehman Brothers, even if you handled things perfectly, where does your swap stand? Right. So as you can imagine, post 2008, this concept, which was, I think if I'm correct, I think it was 25 % of major US pensions and institutions were implementing Portable Alpha pre-2008. That large? It was a significant amount, and at least 50 % of it when surveyed were looking to implement Portable Alpha.

34:47Post-2008, I mean, I think it was called a synthetic risk grenade. It just, the reputation was destroyed. Synthetic risk grenade. That's a great band, a college punk band, right? Absolutely. And and so like many things you live through 2008, the language was right. No derivatives, no shorting, no leverage. I mean, that was on product brochures at that point. People really didn't want to talk about this stuff. And so it sort of disappeared, except there are still institutions that are doing this. And they figured out ways that are much better operationally, or they figured out other ways to get the leverage.

35:31So for example, private equity, we've seen a huge increase in private equity. Trillions, literally trillions. Private equity returns are basically just levered public equity returns. So instead of now me saying, let me get my leverage by getting a swap with a bank, I can take my public equity, get my leverage by taking my public equity, putting it in private equity. If I put 20 cents in, it looks like 30 cents of exposure and I can take some freed up capital and go invest in a hedge fund. Now I don't ever get margin called anymore. And P.S. I'm volatility laundering, to steal a quote from Cliff Asness, on the private side.

36:05And so people have figured out all these very clever ways, and I don't mean clever in a bad way, but clever ways to keep portable alpha, because it's a great theoretical concept that just had implementation issues in 2008, to re-implement it very thoughtfully. And folks like Jonathan Glidden, who's the CIO of Delta's pension, credits it for taking Delta's pension from near bankruptcy to being overfunded in the last eight years. He gives full credit to Portable Alpha as being the reason why. No kidding. That's really interesting. So you mentioned private equity. We're not going to talk about private credit or private debt, but it's the same sort of continuum that Cliff, do I say, complains about volatility laundering.

36:47It's like, hey, if you don't get a daily mark or a tick by tick mark, volatility is irrelevant. We'll let you know what it's worth, sort of thing. But you've talked about systematic alternatives. How do you define systematic alternatives? And is this the approach that anyone who wants exposures to alts should be using? So this is where I have my own strong personal view. So systematic alternatives to me are active investment strategies that are implemented in a non-discretionary manner, right? Probably the easiest way to describe systematic tends to be you're using computer models to make the decisions and implement the decisions on an ongoing basis.

37:32These tend to be things like strategies that will trade futures contracts long and short based on different signals. Those signals might be trend signals. They might be carry signals. They might be value or momentum. and you're going long and short things like oil or gold or Japanese yen, or you might be trading them as spreads against one another. And the idea of many of these sort of systematic macro strategies is to use these signals to capture a lot of the macro trends that are unfolding that your big macro traders would try to capture in a more discretionary fund. What's really, in my opinion, attractive and appealing about them is that they tend to be very uncorrelated to equities and bonds over the long run, and particularly during a crisis, because that's where you often see the opportunities manifest for big, strong moves, either positive in flight to safety assets or the ability to short and profit from things that are crashing.

38:35Really intriguing. um this kind of ties in with a quote of yours that i i want to ask later but i might as well bring it back to this risk cannot be destroyed only transformed explain i don't think i'm the only person who has said this uh in fact i once found a very similar quote in an investment book from the 1980s so this is not a quote that should be attributed to me so it's a general concept and this is something I actually picked up in my graduate school studies when we were going through this education of pricing structured products. And what became apparent to me is, in many ways, the role of the financial industry is to identify risk, extract risk, package it, price it, and transfer it to someone who's willing to hold it.

39:24That is what we do when we raise a of equity financing, right? You're transferring some risk to someone else. So that risk is never really destroyed. Everything you do, whether it's in your portfolio or investment decisions you make, has a trade-off. And sometimes that trade-off is just an opportunity cost. Sometimes it's very explicitly higher volatility or lower downside. But everything we do has a trade-off. There's really no free launch, right? So when I look at something like Portable Alpha, I say, okay, the opportunity is I don't have to try to beat the S &P 500 by picking stocks better, which has historically proven to be largely a fool's errand.

40:04I can try to beat the S &P by saying, well, let me just get the S &P. And I think gold is just going to be positive over my 30-year horizon. Let me just stack some gold on top. Okay, that's a win. Where's the risk? Well, again, I'm using leverage. Leverage isn't inherently bad, but there are risks that I've now introduced for making this trade-off. And so, yes, I get some diversification benefit, but there's some liquidity risks and operational risks I really need to be aware of. And so, to me, it's trade-offs all the way down. And it's worked out for places like Delta's pension fund. Delta, there are a large number of public pensions as well that have used this.

40:42IPERS, Ohio Police and Fire, MOSERS. I mean, this is, I want to say, like, one of the—and And what's interesting is they don't want to talk about it. Oh, really? Now, the public pensions, it's in all their public filings. You can go find this. Right. But a lot of them don't want to talk about it because either, hey, this is what's working for us and we need to beat our competitors, right? Or, again, it just, Portable Alpha has this bad label to it from 2008. And people don't want to see it. And so they're sort of finding ways to hide it. So we'll talk about return stacking in a moment, but I want to stay with some of the research that you did, and let's talk about liquidity cascades, which our mutual friend Dave Noddick has described a new lens on reality that I think people should be thinking about.

41:38I love that description. Tell us what your liquidity cascade work found. so this was research i wrote in 2020 after coming out of the 2020 crisis and it was born from the view that while there was a very real exogenous economic event that caused the market to sell off the day-to-day of what i was seeing happening in markets seemed to be endogenous in other words there was so much volatility and there was so much mispricing that didn't seem to be a reaction to fundamental changes in the world. It's just seemed to be, oh, there's someone got liquidated and had to sell immediately sell down a large levered position.

42:22And oh, there's someone who couldn't meet a collateral call. And so it made me take a step back and say, is there something about the market structure, the way market microstructure has evolved over time, that I don't understand that there are some of these maybe lurking risks that we've implemented. And so there were three, I'm going to call them conspiracy theories for lack of a better word, that hang out there as to what has broken the market. Rationalization. Rationalization. Yeah, to be kind to the people that believe them. And so the idea of the paper was I was going to explore them as objectively as I could.

42:59The big three, as I saw them, were Fed intervention and a decade of zero interest rate policy causing people to take on too much risk, forcing them up the risk curve. there was um and then obviously the the concept of a fed put being tied in there then there was the rise of passive investing right not just active versus passive in the type of price discovery that was happening but but truly how we trade indexed products at a market microstructure level was that changing stocks aren't you know traded individually anymore they're traded as big baskets the way market makers are there's now really just a handful of big market makers rather than a large cohort?

43:39Is that making markets more fragile? And then the impact of derivatives, right? And I think we saw this as an example for people with GameStop, where you had what I would call social gamma, this acceleration through Reddit of people buying out-of-the-money call options to drive through leverage the price higher because market makers were forced to hedge, right? Do you see that less specifically at GameStop, but do you see that at a grander scale when you have a huge amount of structured products being issued in Asia and Europe, or you have all these sort of uses of leverage among institutions, have we gotten, again, to a point of fragility?

44:20And what Liquidity Cascades ultimately argued was anyone who thinks it was just their one thesis was probably wrong. Now, I want to just stop you for a second, interrupt you for a second, and point out how often are big, complicated situations, you know, j 'accuse, it's that one thing. The world is much more complex than that. I remember looking at the causes of the financial crisis. I found dozens of them. When the inflation surge took up in 21 and 22, like people wanted to point a finger. There were dozens of factors, including consumers who said, oh, that's 50 % more? Yeah, I don't care. I'm going to buy one.

45:03Consumers drove inflation as much as fiscal stimulus and all these other things. So how broad a conclusion did you reach that it's never just one thing? To your point, I think people look into a world of incredibly complex nonlinear relationships, and they want a single linear explanation. And it's just not possible. That's the narrative fallacy. They want a clean little storyline in a bow, and that's not how the universe works. All of these things interact. And so what I came out of the research piece with was not my view. Actually, the intro of the research piece, I said, I'm not going to tell you what my view is.

45:42I'm going to walk through this as objectively as I can, and I'm going to paint a picture at the end. It's up to you as the reader to determine, for lack of a better phrase, how full of s*** I am. Right. You know? So what did you find out with those three factors? So the Fed, passive and derivatives. So with those three factors, what I ultimately argued was that they operate in somewhat of a cycle, right? Fed zero interest rate policy is in many ways, as explicitly stated by the Fed, trying to move people up the risk curve. And as people moved up the risk curve, they were trying to find ways to harvest yield or save money.

46:20a move into things like passive, a move into tax-efficient vehicles like ETFs that were having a profound impact on the way things are traded in the market. You're having a consolidation of market makers that leads to potentially increasing fragility or lack of liquidity. One of the things I thought was really interesting in March 2020 is people always talk about market makers pull the plug. Markets go crazy. They're not running a charity. They're going to pull the plug when things aren't going well. Or at least lower their bid-ask spread, wide them out. Yeah, they're going to wide them out and they're going to thin the order book volume.

46:56What I thought was interesting that people don't often talk about is they're actually capacity constrained. They have a balance sheet. And there was, I think it was Virtu during March 2020 that actually was trying to raise$350 million just so they could keep making markets because they had run out of balance sheet. And you go, well, actually, if these institutions are so important to the way our markets function, should they have a line to the Fed? Yeah, that makes sense, right? I've never heard anyone talk about it, right? But if you need them there, and there's only three or four key market makers left, right?

47:33We need to make sure that they have healthy balance sheets. They're systematically important institutions. They need a line somewhere, but the Fed's mandate isn't the smooth operation of the NYSE. the Fed's mandate is low inflation and full employment. So it's little struck things like that. And again, I don't think any of them are the cause, but you start to see some of this fragility creep up. And then as people are moving up the risk curve, they're trying to find ways to also protect themselves. So they're taking on more derivative strategies. We saw this massive boom in derivatives. We saw an adoption of things, leverage strategies, risk parity, and trend following and alternatives.

48:13And again, I don't look at the boogeyman and say the market sells off and it's risk parity's fault. But I look and I say, well, if risk parity and managed futures are selling off and at the same time you have all these massively levered positions via puts that market makers are having to hedge, all that can act in coordination to make a sell off more violent. And then sort of you go full circle to the Fed stepping back in, lowering interest rates and kicking the whole cycle off. And so what I painted a picture of at the end, the reason I called it a liquidity cascade was I painted it was this M.C.

48:45Escher painting of sort of the waterfall, the waterfall. And then it magically climbs back up. And each part of this, it was the Fed sort of is at the bottom of the waterfall and then flight to passive alternative sort of investment strategies and the role of derivatives is at the top. And then some exogenous effect causes the market to crash. The crash becomes more violent. Fed steps in and the cycle kicks off again. So I have so many interesting questions for you. I'm kind of fascinated by the way you look at the market structure and what's driving things, because for me, the thing I'm looking at during those various processes is, and you referenced this earlier, is all the individual decision making that takes place within the context of some financial stress, which, as we've seen, tends to lead to cognitive challenges, behavioral problems, bad decision-making, that human element in the middle tends to react.

49:52You know, it's oversimplifying it, calling it fight or flight. But, hey, that's what your lizard brain is telling you. And it doesn't matter if you're running a billion-dollar hedge fund or a pension fund. Most people are going to go through the same sort of panicky response. It's really interesting that you're focusing on the structure and how does the structure accommodate the bad behavior that we see. You are right that there is absolutely panic and lizard brain. And I don't mean that in any sort of derogatory way. No, it's their survival instincts. It is what it is. I don't think they're irrational.

50:28I think ergodicity economics would argue you have to protect your capital to survive. what so i'll give an example here of where i think it's a very specific example sort of like the market makers example but it's something that happened in march 2020 that is obviously wrong and so vanguard has their mutual funds and they offer etfs as a share class of their mutual funds so if you buy the mutual fund or the etf you are in theory getting the exact same return because it's the same underlying pool of capital minus the tax advantage of the etf Absolutely. Yep. Their bond fund during March 2020, there was a two day period where the ETF traded, I believe it was up to a six or 7 % discount to the mutual fund.

51:15That's a little weird because it's the exact same pool of capital. Right. The difference being you can only trade mutual funds at the end of the day, you have to make a specific phone call to buy or just reach out to whoever your custodian is. Whereas the ETFs are quoted... Intraday, but even at the end of day, that discrepancy existed. It wasn't just intraday. That was the NAV of the mutual fund versus the price of the ETF. Which had a higher trading volume. I'm going to guess the ETF. The ETF certainly had a higher trading volume. But the underlying problem is that the bonds weren't pricing.

51:53The bond market froze up. So when the mutual fund struck NAV at the end of the day, the NAV was based on illiquid quotes of bonds that hadn't traded. The ETF was basically saying, we don't believe those quotes. We think the quotes should be much lower and we're going to price much lower. That's right. There's an interesting free option here if you are a Vanguard client. Buy the ETF, sell the mutual fund. Well, because you can't short a mutual fund, the way it would work is you would just always hold the mutual fund, wait for a crisis to come around, and then jump from the mutual fund to the ETF.

52:27Right. And you basically pick up this free spread based on the fact that the mutual fund is priced incorrectly. Stuff like that shouldn't happen. Why do you say that? I always go back and forth with this. It's not like computers and algorithms are running this. It's irrational primates who are pushing the sell or buy button. Let me rephrase that. things like that don't happen except within a crisis. Okay. And they represent opportunity in a crisis because it is definitively mispriced. And if markets are efficient, there shouldn't be mispricings like that. That's a very, you shouldn't have two things that are literally the exact same basket attached to the same underlying trading 6 % apart, unless there's true limits to arbitrage.

53:15And here you could argue you can't short the mutual fund and buy the ETF. It's hard to argue that spread. But again, anyone trading any bond mutual fund could have jumped to Vanguard's ETF, waited for the price appreciation and benefited. And again, in a crisis, there's so much information coming at you. You might not have seen the opportunity. Right. But I look at a lot of little things like that and I go, markets mostly function correctly the vast majority of the time. But when you see that fragility pop up in a crisis, just is it pause for concern about how things are currently structured? Just a question.

53:48So I'm not saying it's broken. So two responses to that. First, hey, give the Nobel Prize Committee props for offering a prize to Fama and Schiller the same year. It's like, yeah, markets are mostly efficient. Fama's right, except when they're not and Schiller's right. So that's number one. Number two, I have a vivid recollection of sitting in a canoe with Jim Bianco in August of 2009. And Bianco was the first person to describe the Fed response to the crisis as the first person I read. And this was really early. hey, the Fed has made cash trash. They want you out of bonds. They want you into equities.

54:35Maybe it's going to take people a while to figure this out. But he was the first person to come up with Tina, right, and said, people are going to have to stampede into equities. We're going to have a rally. And I said, it's funny. I feel like the two of us are part of the six blind men describing the elephant, because to your point about mispricing, I recall saying to him, I don't know if you're right. I like that theory. But my day job as a market historian is whenever stocks are cut in half in the United States, that's a fantastic entry point. And if you bring up, well, what about 1929? Yeah, you didn't get to the bottom till 32, but even down 50 % on the way down to down 87 % was still a great entry point.

55:25And that's the exception. Every other time you're cutting half the United States, you have to buy with both hands. Well, and what's interesting to me there is you and Jim are discussing, I love your analogy with the blind man and the elephant. Jim is discussing a supply and demand concept, and you're discussing a fundamental view, right? I see the world through a behavioral lens. he's seeing the world with. The Fed is going to cause a giant increase in demand for equities regardless of what the supply is. Guess what happens to the prices? And that'll drive prices up. And it costs many, many fundamental people, right, to say markets are overvalued, missing the fact that you had another market structure change, things like a 401k that was almost nonexistent in the early 2000s.

56:10That's several trillion dollars now. You just have a stampede of buying every single month and people being forced into markets as a retirement vehicle, right? That is their savings account, particularly when cash is returning nothing. And you have a dramatic shift in supply and demand. And by the way, over the same cycle, you saw fewer IPOs. So you're increasing demand into public equities with fewer, less supply. Right. At the same time, you have huge buybacks, right? A lot of people don't realize the Wilshire 5000 is something like 3 ,400 stocks. It's like totally misnamed. And the past 20 years have seen, yeah, there's been a lot of stock issuance in Silicon Valley.

56:51But overall, the size of the share float that's out there has shrunk. Another big—I don't know what the endgame of that is. Can you do that perpetually? Can you de-publicize public markets? I don't know what the endgame of any of this is, candidly. But I know you've had folks like Mike Green on. I think he was on even recently, who have strong views about what passive is doing. I don't have particularly strong views in any direction. I just like asking the questions. Maybe I lob out a little grenade and let other people fight over it. But I think they're fascinating and worthwhile questions because I think in many cases, we just accept we have some of the most wonderfully functioning liquid markets in the world.

57:34We are truly privileged in the U.S. to have what we have. I don't think it hurts us to ask, are we overlooking anything? Is there any way in which we are unintentionally designing ourself into a state of fragility? It was pretty clear that people should have been asking that question in the mid-2000s and just had no idea the sort of misaligned incentives and really complex structures that along with some – really, we got used to zero. But when Greenspan post 9-11 took rates down to under 2 % for three years and under 1 % for a year, that was really – we hadn't seen anything like that for decades and decades.

58:19And zero, no one knew how to deal with that. And then once we started seeing negative bonds, like you lend us money and you pay us to hold it, like wait, what? And I think that caused all sorts of problems around the world. And people just didn't know how to contextualize. And to your point on behavior, I think something we talked about earlier, where the sample size here is small. I think if you took the market to where it was a decade ago and said, Fed's bringing rates back down, the world's bringing rates back down, people would look backwards with the playbook and say, we're going to just do all that again.

58:56Right. And markets would not respond the same way. They would probably do everything in an accelerated fashion, but you wouldn't get the same result because people's behavior would adapt to that previous sample. And so it's very complex of how these things work. A little reflexivity in that. Although you could make the argument that in March 2020, down 34%, and it felt like six weeks, people look back to 2009 and said, oh, I got to be a buyer. because the last time we saw a big crash, the Fed rescued the markets or the Fed did this and ultimately led to that. Maybe rescue is too oversimple. But isn't this why everything eventually gets arbitraged away?

59:42Don't the playback from the last cycle, the playbook not work in the next cycle because, hey, we've kind of figured this out? I'm not sure we've ever figured it out. But again, I think a lot of this does get priced in. The whole idea of markets are they're supposed to be efficient information discovery machines, and they have proven to be tremendously powerful and efficient allocators of capital over the long run. It's the best machine we've got. And so I certainly wouldn't bet against that machine. I'm Carol Masser. And I'm Tim Stenevec, inviting you to join us for the Bloomberg Businessweek Daily Podcast.

1:00:16Now, every day we are bringing you reporting from the magazine that helps global leaders stay ahead. We've got insight on the people, the companies and trends that are shaping today's complex economy. That's right, Tim. We're all over global business, finance, tech news, all as it is happening in real time. And we've got complete coverage of the U.S. market close. Gotta say, basically, if it impacts financial markets, if it impacts companies, if it's impacting trends and narratives that are out there, we are on it. We also have a lot of fun doing it. Bloomberg Business Week also brings you the analysis behind the headlines through conversations with our expert guests.

1:00:47And we are doing this all live each weekday. And then we bring you the best analysis in our daily podcast. Search for Bloomberg Business Week on YouTube, Apple, Spotify, or anywhere else you listen. Check it out on your way home from work to catch up on the conversations that you miss during the business day. And on the weekend, check it out for a complete wrap-up of your business week. That's the Bloomberg Business Week Daily Podcast. I'm Carol Masser. And I'm Tim Stenevek. Subscribe today wherever you get your podcasts. Let's talk a little bit about your ETFs and return stacking. starting with the first question is why pivot from pure research to managing assets and and why if you're managing assets did you go into the etf side of it The shift from pure research to managing assets, I think is one that a lot of people ultimately make.

1:01:38When you're just providing research, you really don't have any control over distribution, messaging. Often you don't have control over how your research is being used. And if you're the one doing the research, you often have the best idea of how it should be implemented, or at least you believe you do. It's not quite like selling data or raw data. You're selling a manipulated form of data that you think potentially has some edge or some utility. And you want to make sure that gets expressed correctly. And then, frankly, there's probably a little bit of ego in there going, okay, I want to get closer to the action.

1:02:10I actually want to implement the portfolios that I want to implement. I think I've got some good ideas for bringing some strategies to market. And so over time, we went from we'll provide research to we'll be an index provider to we'll be a sub-advisor to we'll launch our own funds. And I will say to my discredit, I originally launched a suite of mutual funds. Right. Which was for someone who grew up in the world of ETFs and was helping run ETF model portfolios, talk about a dumb business move. What motivated you to go mutual funds over ETFs? So it was 2013, and what concerned me about standing up ETFs is at the time we didn't have firms like ETF Architect or our friend Wes Gray or Title that were helping with the administration.

1:03:04My concern of setting up my own ETF was that I was going to have to handle all the intraday trading of the creation and redemption baskets. It was going to require me to hire a whole ops staff that I candidly didn't have the experience or know how to manage. And I said, versus the mutual fund. Which is a little simpler, a little cleaner. Which is a little simpler, a little cleaner. And there was a well-trodden path of bringing mutual funds to market. So that was 2013. And again, I just didn't feel like being the one who was going bushwhacking to figure out how to do this. I should have. How long did it take you to realize, hey, ETFs are a more efficient, especially if there's any sort of turnover, ETFs are a more efficient model and I can make this work at a similar price?

1:03:49So I absolutely knew from day one ETFs were a more efficient model. I think it probably took me two or three years to say, I've chosen the wrong vehicle. not just from a tax efficiency perspective, but from an appetite perspective. 2013, people really started to go, I don't even want to talk about mutual funds anymore. If it's not an ETF, don't talk to me. By 2017, 2018, we were having conversations with firms that said we only invest in ETFs, ETF model portfolios only. And by the way, I've got a whole spiel on this that I think that's just as misguided. Strategy and structure need to be aligned.

1:04:29And there are some strategies for which the ETF, I think, is definitively the wrong structure. It's a whole different conversation. But I ultimately said, I am, you look at the flows. You can just look at a map of the flows and say, I am selling into a dying industry. I am in the wrong product wrapper. And so I ultimately made the decision to shut down every fund and restart the whole company. So as opposed to just converting them, you went that way, the exit and the relaunch. Yeah, because part of - And by 2017, Wes was doing a number of ETFs, a number of other people and other organizations made it, I don't want to say painless, but less painful to stand up an ETF.

1:05:10Absolutely, absolutely. Yeah, I ultimately said, I think there are decisions I made wrong from a structure perspective. And I think there are decisions I made wrong from an actual product perspective. And this is where I think things can sometimes get a little weird in this industry where a guy like me who's a quant wants to always talk about investment strategy. But I was listening to a podcast the other day, an old podcast from Patrick O'Shaughnessy actually. And he said this quote that was basically an investment product is more than the sum of its returns. And what he meant by that is when people buy an investment product, a fund, yes, they're often talking about the investment strategy and the returns.

1:05:48but there's also a utility that often we don't talk about in this industry. So why are high dividend yield products so popular? All the math tells us we should not buy high dividend yield stocks. They are typically an underperforming style of value. And yet there are billions, tens of billions, if not hundreds of billions of dollars in high dividend yield ETFs. because people are expressing a utility that they just like getting that dividend paid to them every month. Could they synthetically create that on their own dividend? Absolutely. But they're lazy for lack of a letter word and they like the consistency.

1:06:29And there's utility in that, even though it's from a return perspective, suboptimal. And that's hard for people like me sometimes to look at and say, no, I need to teach you to do a better way. Let me educate you as to why you're wrong instead of saying, no, that actually has really good product market fit for what the end buyer wants. And so I think I had made some poor product design decisions. So let's talk a little bit about what return stacking is, how it's similar and different to Portable Alpha. Let's start out. You wrote a really well-received white paper on the entire concept of return stacking.

1:07:10Give us the simple explanation of what this is. Yeah, so all credit goes to my colleague, Rodrigo Gordillo, for coming up with the phrase returns stacking, because I think it's a more generalized form, but I think it's much more approachable than portable alpha, right? Portable alpha. You need to understand what alpha is. What does porting do? If I say I'm stacking returns, I'm stacking the returns of gold on top of the S &P, you can probably guess that one plus one equals two. Right. It sort of sounds like math. And that's effectively what we're trying to do. It goes back to the problem we were talking about earlier of trying to solve this addition through subtraction issue with diversification.

1:07:50How do I get an industry that disagrees on everything except for diversification is good to add more diversification to their portfolio? Right? You talk to anyone and they'll say, yeah, all else held equal. We want more diversification. And then you go look at their portfolio. So it's basically the S &P 500 in bonds. And there's nothing necessarily wrong with that. But the question is, can we go further to introduce diversifiers that can improve both the consistency with which we can achieve our outcomes and the return potential? And so return stacking at its core is trying to take the institutional concept of portable alpha and bring it downstream.

1:08:29Because institutions, to implement that concept, have to buy futures and swaps and manage all these separate accounts. What we've tried to do is prepackage that concept into a suite of ETFs. So the white paper comes out. WisdomTree launches a product related to this. Did you have anything to do with that? So back in 2017, you and I, I don't know if you remember this, you and I were on a Barron's roundtable called What's Next for ETFs? And at that roundtable, I said, I think what's next for ETF are capital efficient ETFs. And the example I gave was, instead of having a stock and bond fund, this fund could buy the S &P and overlay with treasury futures.

1:09:17And so if you give it a dollar, it's going to give you, say, 90 cents of the S &P and 60 cents of treasury futures, giving you a 90-60, a 1.5 times leveraged 60-40. And the idea there is, okay, you can put two-thirds of your money in that fund, get a 60-40 exposure, and then you can take that one-third of your cash and do whatever. You could leave it in cash if you just like sitting on cash, or you can invest it in alternatives, implementing Portable Alpha. Jeremy Schwartz, who's a good friend of both of ours, showed that article around internally. We had a whole bunch of Twitter conversations about it.

1:09:51Next thing you know, he says, hey, Corey, I'm launching a product on this, and the Wisdom Tree NTSX fund was born. I recall Jeremy subsequently launching that. I hope they at least tossed you a bone in consulting something, nothing. Jeremy had me on a couple of podcasts to talk about it. All right, there you go. I hope I didn't say anything too stupid at that roundtable. I can't remember that up on 6th Avenue. Yeah. Right? Got by their offices. That's right. It was. And I actually have been using my headshot from that article since then, which at this I got a couple of great photos from that. So I didn't realize this is like a Pulitzer Prize winning photographer who took our photos.

1:10:30They're the best headshots I've ever had. Same, same. And finally I said, it's seven years later. I'm officially catfishing people with this photo. I don't look anything like this anymore. Every now and then I will see something show up on a bio at some event for me. And I'm like, dude, that's 20 years old. I'm not only grayer and 20 pounds lighter than then, but like I look nothing like that anymore. It's like, well, we found that online. So, yeah, I know exactly what you're talking about. So I had to get rid of that one. So, yeah, so that was the birth of the NTSX fund. And I was super happy to see WisdomTree do that because I really do believe that this is a whole category of products that has not existed really before.

1:11:13There's a couple of select examples, but really should be a whole part of the industry. Because again, institutions have used this concept for 40 years and use it very effectively to be able to say to an investor, Hey, I think a strategy like Managed Futures Trend Following adds a lot of value to your portfolio. And no longer do I have to sell some stocks and bonds to make room. Right. I can let you keep your stocks and bonds, and I'm going to add a 10 % allocation on top. When managed futures go through a lost decade, like they did in the 2010s, the investor will barely notice it. Right. And they'll be able to stay in it for when managed futures does well in a year like 2020.

1:11:52So that's the behavioral component of this. How does this differ just from straight up leverage? It sounds like return stacking has a big leverage component. It is. It is absolutely leverage. I think the idea here is, again, leverage is a tool that accentuates the good and the bad. We want to be very thoughtful about what we're stacking on top. So if you're a 60-40 investor, I certainly would not say use this concept to stack more equities. You're probably just going to get in trouble. But if you can use this concept to stack diversifiers like commodities and gold, historically, that hasn't been an issue.

1:12:28And in fact, I would point to the Bridgewater All Weather Fund, right? Which is 25 % gold. Takes this concept to the extreme and runs with a significant amount of notional leverage with the idea they're trying to risk balance all the variety of asset classes. And it held up incredibly well during 2008 despite having so much leverage. And it's because they're using leverage to unlock the benefits of diversification rather than using leverage to amplify returns. Gotcha. That makes a lot of sense. So you currently are running five different return stacked ETFs. Do they each have a different goal?

1:13:03How do different combinations work? And what are we,$700,$800 million? Yeah, just clipped over$800 million, launched, I guess, 18, 20 months ago. So we're very happy and pleased with the growth. And I think it speaks to people understanding what we're trying to do and this new form of diversification we're trying to build. Talking about getting a little bit smarter on the product side. One of the things I think I underappreciated earlier in my career is that advisors and allocators want control in their portfolio. And so with this new suite, what we've tried to come out with is what I would call very much a Lego or building block approach, where each product is very narrowly focused so that allocators can use them how they want.

1:13:45So I'll just give two really quick examples. We have one fund that for every dollar you invest with us will give you what is effectively a dollar of passive large cap U.S. equities, plus a dollar of a managed futures trend following strategy. We have another fund that for every dollar you invest with us will give you a dollar of core U.S. fixed income plus a dollar of managed futures trend following. Same managed futures trend following on top, but one gives you the S &P, one gives you bonds as the bottom layer. So that would allow someone to say, I want to own both managed futures, and either I'm bullish and I want equity, or I'm conservative and I'm bearish and I want bonds?

1:14:27I would go the other way, which is you're a very aggressive investor. You're, let's say, a growth client 80-20. You just have more equities around. It's easier to potentially overlay your equities than it is on bonds. Or you're a very conservative investor. You just have more bonds around. Or you have a strong view that you can add alpha in your bond managers, but you're never going to beat the S &P 500. So take that passive S &P 500 and buy our fund. You get the S &P back with the managed futures on top because you don't want to do it with bonds because you think your bond managers can add value.

1:15:02So again, I'm being non-prescriptive in the products I'm bringing to market. I'm letting people say, I like the concept of adding an overlay. How I want to express and where I want to express and the size with which I want to express, that's a conversation and a dialogue we have when we consult with our clients. So a couple of questions on that. First, who are the typical clients? Are these institutions? Are they RIAs? Who wants this sort of return stacking in either their core portfolio or any of their satellite holders? Yeah, it's really funny. So you would think potentially with institutions, and we have lots of calls with institutions, and they all say the same thing, which is we love this, and we also do it ourselves.

1:15:43We don't need to buy an ETF. Really? They're doing it the way they've historically done it, which is they have banking relationships and they manage the futures and the swaps. And so they don't need a product like an ETF. So where we tend to see and have seen all the flows is independent RIAs who are saying, I'm trying to figure out how to get diversification. I like alternatives. But man, it is hard to say to my client for the fifth time when they point to that managed futures fund as a line item and they say, why in the world do we have this? Right. And you're saying, well, because diversification and the next cycle.

1:16:23Brian Portnoy says diversification means always having to say you're sorry. That's right. And if you are an advisor running a business and you're saying sorry to your clients too much, that's a great way to get fired. There's just real business risk there. And so what we're finding is not only, I think, do we make a compelling value proposition of, hey, this is an interesting way of trying to add returns to your portfolio in the portable alpha sense. If you think managed futures generates 200, 300 basis points of excess returns over time, why are you picking stocks? Just buy the S &P 500 and add managed futures on top.

1:16:54But for the diversifiers, they're going, this is a great way to introduce my alternatives without giving up all the beta and having that return hurdle issue and having that behavioral friction issue. All right. So you have US equity with managed futures. You have US bonds with managed futures. What are the other ETFs? We have a US equity plus what we would call a multi-asset carry strategy. So this is... So managed futures is typically done with trend following signals. It can also be done with what's called a carry signal, which is you can sort of think of carry as your yield. What's the return you're going to get if the world doesn't change?

1:17:30And so carry signals can be powerful predictors of total return. So it's just a different quant signal. It behaves differently, trades a similar universe of currencies and commodities and equities and rates around the world. So it's long, short, just a different quant signal. So we have a US plus that. We have a bonds plus that multi-asset carry. And then the final piece is what I consider to be our most flexible portfolio, which is just you give us a dollar, we'll give you a dollar as passively allocated as we can global stocks plus a ladder of US treasuries. And the idea there is not to say, let's stack bonds on top of equities in your portfolio.

1:18:10The idea there is to say that is an incredibly powerful capital efficiency tool that allows you to stack whatever you want. So let me give you a really quick example. Let's say you've got a 60-40 portfolio, 60 % stocks, 40 % bonds. If you sell 10 % of your stocks and 10 % of your bonds and buy 10 % of that fund, that 10 % of that fund gives you both the stocks and bonds back. and now you have 10 % left over in cash with which you can do whatever you want. You could have it sit in cash and then sit in T-bills and the return of that portfolio would be sort of the same as your 60-40, but hey, now you've got more cash on hand.

1:18:49You can do some interesting things about self-financing actually because you're technically borrowing from yourself. You can use that cash and you've actually just taken a loan based on and it's very attractive financing rates. The embedded rate of financing in these futures is like T-bills. So instead of borrowing from a bank, you can actually borrow from yourself. Or you can take that cash and invest in something, hopefully for diversification or return. But as long as whatever you're investing in outperforms cash, you will have added value to your portfolio. So let's say you love managed futures as a strategy, but you don't like the way I implement managed futures.

1:19:24You love Cliff Asnes at AQR. You love their fund. Well, you can buy my global stocks and bonds fund to free up the cash to then invest in his managed futures fund. And what you have effectively done is kept your 60-40 hole and stacked his fund on top. And so you can now stack whatever alternative asset class or investment strategy you want with our tool. Huh. Really, really fascinating. The name of the company is the Return Stacked ETF Suite. There are five different ETFs on it. I have a couple of questions I've been saving before we get to our favorite questions. And let's start with something that I think is really kind of interesting.

1:20:09During the pandemic, you did a video with Jason Buck where you were discussing like deep in the weeds research into NFTs and crypto and degenerate trading. Like I, in fact, that might have come from Nautic said, oh, you got to watch this. This is hilarious. In a good way, not a sarcastic way. What was going on with crypto and NFT trading during the COVID lockdowns? So Jason Buck is a good friend of mine. He runs Mutiny Funds. And we started this podcast. As you do. Mutiny Funds. Mutiny Funds. Wasn't there another pod? Maybe it was he who was hosting it. Was Pirate Capital or what? Pirates of Finance.

1:20:52Pirates of Finance. So that was Jason and I started that during the pandemic. We weren't allowed out of our houses anymore. I love that. I love the title of that podcast. So that was a fun one for us where we just said, you know, that was the era of, all right, on a Friday afternoon, let's grab a beer, chop it up, see what's going on in markets. And for folks who weren't paying attention to the crypto markets at that time, it was an absolutely Cambrian explosion of activity. You had all these retail traders who started trading crypto and the available functionality of what you could build in crypto really exploded.

1:21:25So you not only had NFTs, but you had all these what were called protocols or applications that were doing all this interesting stuff. And it was a fascinating world to explore not only from the what does this mean for the future, but there were some incredible trading opportunities for people who operated in traditional markets that you would see things and say, that shouldn't be like that. That's wildly mispriced. And in any traditional market, that wouldn't exist. But okay, I'll put my money where my mouth is. And so there was a fun trading opportunity. I certainly wouldn't say I maximized it.

1:22:02Yeah, but you're a computer science, market structure guy. This is your sweet spot. And it's just fun because it was almost by definition, because of regulatory reasons, lots of parties couldn't get involved. you had a market that was being dominated by retail i don't say i'll lower information flow right more momentum driven low information voters it just the systems weren't set up there were limits to arbitrage and so you had these situations where you said oh you can make a good deal of money here and i had friends who dropped their careers in finance and said i used to be a market maker for treasury futures and i'm now a market maker for crypto and oh now i'm retired two years later because the market's that inefficient.

1:22:46And all I had to do was port the exact same skill set that was a bloodbath in traditional markets, eking for every BIP. And it's just, you're just printing money. And it was a very limited window. That does not exist anymore. Right. But there was this really fascinating window of both investor behavior and opportunity in what was developing and what it all could become. So I'm assuming you made a couple of shekels trading. There were some fun trades. There were some fun trades. How quickly did you realize that window was closing? And I'm assuming that was pre-FTX and SBF and Sandbank and Fried and that mayhem.

1:23:26It was probably during the Luna collapse. And again, I apologize for folks who didn't track the - So Luna is a stable coin that was supposed to just trade at a dollar. What's his name? Very famously, he got a tattoo of it. Novogratz. And then suddenly the rug was pulled out and it turned out to not be all it was. Yeah. You had these stable coins, which are a way for people to transact in what are effectively dollars on the blockchain, some of which are actually backed by dollars and others of which are fractionally backed or backed by a variety of assets. And then you had what was called algorithmically backed stable coins.

1:24:10And I don't think there's any success stories there. They all blew up. Mark Cuban famously lost a bunch of money in one of those. Oh, did he? I didn't know that. I believe it was called Iron Finances was what it was called. And that, again, when you have nothing backing a coin other than a systematic strategy that's going to try to buy and sell the coin to keep it within a peg, it just— Doesn't that sound like portfolio insurance from the 87 crashes? Nothing new old again? is it's just amazing that, oh, yeah, we'll find a way to just hedge it as the market starts rolling off. So you had all this abundance of hot capital in this market that suddenly evaporated.

1:24:51You had very loud players like Three Arrows Capital that was massively over-levered start to fall apart. And as that liquidity disappears, so with it do the abundant trading opportunities. And so that's where it started to become clear to me. It just—the game was over. It was a game of musical chairs. Right. And the music had stopped playing. And I was like, I'm just going to get out of the room. Right. Because you can overtrade these things. No, to say the very least. And also, it's not my job. I actually do have a day job. Right. So that was kind of interesting. You're also located in Florida, in South Florida.

1:25:28what's it been like being a new dad in the midst of uh the west coast of florida that really got shellacked by three consecutive everybody's talking about uh helene but what was it debbie over the summer really did some big damage and then the middle one so so it was like a triple hit yeah i mean i live in the tampa area and i moved there two years ago and i should have known something was wrong when i i originally from boston i was moving from boston driving down and and it was a hurricane showed up out of nowhere and i actually had to stop my drive halfway down and just hang out in north carolina just hey well it's one of those they show up four or five days and you go okay i'm watching the path and it became clear you know all my furniture is getting delivered right the day before the hurricane's supposed to hit i've got a pregnant wife who is accepting the delivery as i'm driving you know the car down and it just, I was like, I should have left at that point.

1:26:27But most importantly, my family is safe. Our first floor of our house got completely destroyed. My car got totaled. It's all overshadowed by how amazing being a father is. It's hard to complain about any of that in the grand scheme of life of just, you know, I got a new kid and it's amazing. What's the rest of the neighborhood look like? it honestly is pretty devastating so down near the water every single restaurant is just gone just gone just gone like wiped off wiped wiped off we had wow we had an eight or nine foot storm surge yeah so not quite sandy but pretty close pretty close so you can imagine all these beach front tiki bars yeah you know under nine feet of water and then the tide goes out it's just There's nothing left.

1:27:16It's gone. You know, if you had a two-story house in our neighborhood, your first floor was gone, and the second floor is what remains for those who had single-story houses, which is the majority. Yeah. You know, everything ends up on the curb. Right. And so driving down our neighborhood for the last, I guess, two months now, it's just people's lives are on the curb. and what people don't tell you until you live this is that seawater is also mixed with sewage water and so the whole place reeks and all the plants die because they become so everyone's garden so you're just driving around this place that looks like a trash dump as all the plants are dying and it smells awful I mean but aside from that wonderful place to live so you were renting right?

1:28:09Yes. So are you going to stay there? Are you going to relocate? What's the thinking? Are you going to buy? You're asking the wrong person. You should ask my wife. I don't have executive power here. I think we will stay in the area. We really love where we live. St. Pete is a wonderful area for us. We love raising our son there for the moment. We'll see how it plays out. All right. That's really interesting. All right. My last two curveball questions for you. At Cornell, you played rugby. Tell us about that. Yeah. So I grew up as a lacrosse player, got to Cornell, and I mean, the lacrosse program there is phenomenal.

1:28:46I was never going to make the team. That's a serious, serious program. Yeah, and I've always enjoyed being athletic, so I was looking around what to do. Where else can I break bones besides lacrosse? Yeah, well, this is particularly dumb because in high school I actually played lacrosse and got a skull fracture. Nice. So all the doctors said stop playing sports. Right. They wouldn't let me play soccer anymore because I couldn't head the ball. Really? Yeah. Oh, so that's a serious skull fracture. Oh, yeah. I broke my nose playing soccer in a collision. And I just remember waking up flat on my back.

1:29:18But nobody ever said, you should stop. Oh, yeah. No, I had to get a spinal tap. I had brain fluid leaking out my ear. Right. This was a serious one. So anyway, so I wasn't really supposed to play sports. And as I got to college, I thought about not playing anything. And there was a club rugby team. And I just said, you know, this sounds bad, but you're like, you're at an Ivy League school. It's kind of like it feels like an Ivy League sport. I was like, that would just be fun to go play rugby. Right. And it was a ton of fun. And it was incredibly stupid of me. Right. Broken fingers and ribs. No, I survived pretty well.

1:29:53So I was what's what's you've only known me as I've been older. I used to probably weigh 40 pounds less. Oh, really? I was. Yeah. In college, I was a very thin guy. Yes. And so they put me way out in the winger position where I just ran up and down the field. And so I wasn't really massively in the scrums and the rugs. I got you. That's interesting. And our final curveball question, favorite Dungeons & Dragons monster and why? And you could guess where that question came from. Yeah, I can guess where that went. So wait, let me give a little color. You're in a financial D &D game that's been going on for years.

1:30:32So this is funny. Actually, if you'll allow me. Go ahead. Can I bring this into the first, your last five questions? Sure. Because I believe the first of your last five questions you ask every guest is what content are you consuming? Right. What are you watching? What are you listening to? And the problem is with a rapidly expanding business and a young kid at home, I don't have time to watch anything. But what I have carved time out in my life for has been this Dungeons and Dragons game. It's hard to say with a serious face. Right. But there are seven of us in the industry who started five years ago, and we play weekly.

1:31:06And it's three hours. And that sounds incredibly nerdy, but for those who have never played, Dungeons & Dragons is really a collaborative storytelling game. We have an unbelievable guy who runs the game who is just this imaginative world builder. So imagine, you know, if you like fantasy or sci-fi, you can run it however you want. he builds these unbelievably complex worlds that we get to explore as characters. And he has a big narrative arc, but he's constantly adapting to how we interact with the world. And then there's the randomness, which is when you try to do something, you're rolling dice and your success or failure is based on the dice.

1:31:44So the dice play a role in the story. And so for me, that's been a really big outlet of not only fun with the guys, but that's a lot of content consumption in the sense that the story's playing out in front of me. but also I get to collaborate and be a creative part of the story creation. So that's been a really special part of my life for the last five years. So that'll be our first question because you're not really watching or streaming much. Let's talk about mentors who helped shape your career. So there I will say, and this ties to some of the latter questions, I think one of the mistakes I made early in my career is not appreciating how much of an apprenticeship industry this is, especially the more niche you go into markets.

1:32:26There's just wisdom and experience that it's hard to learn for yourself. And it's very easy if you don't have that wisdom to knock yourself out of the business from a performance perspective. And so I didn't, I didn't understand that. I wish I had had more mentors. What I will say is on the business side, my father and my business partner are both phenomenal entrepreneurs. And I learned a ton on the business side from them. I will say I've been very fortunate, reading and interacting with folks like Cliff Asness and Auntie Ilmanin, who have been, you know, huge idols of mine in what they've contributed to the industry, and just been very open to communicating with me, I would say from an actual practitioner perspective, have been big mentors.

1:33:08Really, really interesting. Both of them at AQR, right? Yes. What about books? What are some of your favorites? What are you reading right now? so again not a lot of time to read i just got done listening to all lord of the rings on audio though i do do a lot of audio books and um how was that on audio as opposed to so andy circus who played golem who's a phenomenal voice actor read all the books and he is so good at like when he did gandalf it sounded like ian mckellen really you could do voices he's doing voices and it's just, you know, again, if you're not into that type of book, you're not going to enjoy it, but he brings it to life with such vibrancy that it's not someone just reading the book.

1:33:53It's like he is, he's singing the songs, he's playing the characters, he's giving it to you like a play. It was just really, I mean, I got through all three books very quickly and I wish I had more. So that's one I did just recently and I tend to do audio books because it's easier for me when I go out for a walk or a run And to listen to that than it is for me at the end of a day to say I'm going to get through 10 pages of a book and then fall asleep drooling on it. I know what that experience is like. Our final two questions, what sort of advice would you give to a recent college grad interested in a career in quantitative investing?

1:34:31it. So I'll go back to what I just said, which was, and I was interesting. I was just at a symposium at the college of Charleston, which is put on for their students. And I said the same thing to their students, which is I'm loathe to give advice, but my experience was, I wish I had a mentor. I wish I had understood that for where I was trying to go, I would have gotten there a lot faster if I had found a hands-on mentor and understood that this is an apprenticeship industry, Whether you are looking to do deep quant research or looking to build product or run an RIA, every side of it has so many complicated facets that you have to navigate from the regulatory side to understanding the behavior of your clients, understanding the markets and the microstructure and who's operating in them.

1:35:20Trying to discover that all on your own, there's a great chance you don't survive it. And so to me, I wish, I take that back. I've had a phenomenal career. I'm very lucky. I wouldn't change a thing. But if I was doing it another path, I would have said, man, maybe I should have just gone to work at AQR for a while. That might have jumped me forward, you know, instead of stumbling in the dark for so long. Except you would still be at AQR if you worked at AQR. You know what? First of all, they wouldn't have hired me. They have a lot smarter people than me. I'm kind of sad about the demise of Twitter because it was this, at least in finance and FinTwit, there was this ability to have conversations with people, whether it was in public or just slipping into someone's DM and chatting, that seems to have kind of faded away.

1:36:17But like the 2010s was a golden era of, I don't even know what else to call it, networking, mentorship, connections, just, hey, you're working on this. I did some research on this. You might want to take a look at it. Oh, thanks. That's really – like there was a very level playing field of not even mentorship, just encouragement from people. well, I kind of feel a little bit of a loss that that's gone away. I don't know how you, like you were right in the thick of this as well as so many other people we know in common. I'm still very active on Twitter, but it's a very curated thing for me. What I find is I, like I'm in groups, for example, of 40, 50 quants who can't disclose who they are and they don't want to share a lot publicly, but you've built up this trust with them that you can ask these questions of things you're working on and get feedback from people all across the industry in a way that I'm still not sure I could find anywhere else.

1:37:22One of the things I've noticed is back in the mid-2010s, early 2010s, the community was just smaller. And so you could have a lot of conversations in public. As Twitter grew and grew and grew, just the request for your time became more and more. It used to be I might have one, some young person reaching out to ask me a question. Now it might be 20 times the volume. And it's just, it's hard to be as responsive and have the intimate connections I think you had when it was a smaller community. So I know a lot of people who, Twitter has its problems, but a lot of people who bemoan the loss of that prior experience.

1:37:57I think it was a small community aspect that has disappeared. And it's hard to rebuild that unless you build your own walled garden. There's no doubt that that's part of it. I've also found that I spend much less time in like the main open channel. And now everything is, for me, has been list driven, whether it's economics or markets or I even create a separate list just for charts and put a bunch of guys who are technically oriented. and it, like a lot of the worst aspects of Twitter go away when you're in a curated list of people who are like-minded. But you lose a bit of the serendipity of discovery.

1:38:39Yes, exactly. And so then you're going, well, I hope someone retweets something interesting so I can discover a new person. And there are absolute trade-offs to it. I mean, so it wasn't summer of 24, it was summer of 23. I went out to dinner, I come back home and there was a password request made a change on Twitter that I didn't make. And I go to say, this is a me. They've already given the account away to somebody else. Like they're stupid. First of all, making two-factor authentication an option, just so idiotic. And it took three months to get the account back. And I finally got it back. and some of our mutual friends said, hey, you're not going to recognize the place.

1:39:25You missed, like, it's like when at the last inning of a baseball game when everybody files out and you're in the bathroom and you come back and where did everybody go? Well, I'll tell you, during that period, I had some fantastic conversations with you over DM. So I, you know, I miss whoever that was. It's really kind of, you know, it's so weird to feel Like, I never felt a loss when Facebook changed the whole, to use Cory Doctorow's phrase, of places like eBay and Amazon and Google. Like, it's annoying. I don't love what's happened to Apple, although they're still functional, useful for me. Twitter is the first one where it's like, man, this was really special in our space.

1:40:16And then it's just gone away. And, you know, there are a lot of reasons to not be happy with Elon Musk. Not the least of which are the never ending promises for products that don't seem to arrive with any sort of reasonable timeline. But man, firing 80 % of the engineers and leaving a smoking hulk behind, it's really kind of disappointing. I understand why people don't love Twitter. I still have this nostalgic feel for when it was good, it was so good. And our final question, what do you know about the world of investing that would have been useful to know when you were first launching in 08, 09?

1:41:06There's a phrase I have been repeating a lot in the last year and a half at my own business, which is why are we playing the game on hard mode? Play the game on easy mode. I mean that both in the investment strategies we choose to pursue and the products we want to bring to market. I'm not going to talk so much to the products here. though I'm happy to go into that. On the investment strategy side, I wish someone had just sat me down early in my career and said, low breadth bets you don't get to repeat a lot. Don't do those type of, don't try to time the market. I mean, like every young person, I spent a whole, of course I'm going to be the one to crack the market and figure out how to time it.

1:41:51It's a dumb low breadth bet you don't get to repeat a lot. It's like trying to flip the coin three times in your life and guess heads all three times. It's just very unlikely, and when you're wrong, there's a lot of damage. All right, so be smarter about the type of strategy you're going to pursue. By the way, the S &P 500 is the hardest universe to try to actively pick stocks in. Maybe don't try to pick stocks there. Go play the game on easy mode where there's a proven opportunity rather than having the ego to say, no, I'm going to be the one to figure it out. There are people who can beat the market, but even if I'm smart enough to figure it out or can find that edge, why not find it somewhere where it's easier?

1:42:31And so I think for me, I wish earlier in my career, someone had really beaten into me. Are you just playing the game on hard mode just because you want to? Or is there an easier way to do this? At the end of the day, you're trying to meet this objective. What is the easiest way to meet it? Really, really interesting. Corey, thank you for being so generous with your time. We have been speaking with Corey Hofstein. He is not only the CEO and CIO of Newfound Research, but portfolio manager of Returned Stack ETF Suite. If you enjoy this conversation, well, check out any of the previous 540 we've had over the past 10 years.

1:43:13You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find your favorite podcast. And check out my new podcast, At The Money, short, single-topic conversations with experts about subjects that affect your money, earning it, spending it, and investing it. At The Money in the Masters in Business podcast feed or wherever you find your podcasts. I would be remiss if I did not thank the CRACK staff who helps us put these conversations together each week. My audio engineer is Meredith Frank. Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts here at Bloomberg.

1:43:53I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

1:44:13This is Caroline Hyde. And I'm Ed Ludlow, inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast.

1:44:46Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts.