Return Stacking

Episode Summary

Executive Summary: The episode explains “return stacking,” an ETF-based form of portable alpha that combines core stock or bond exposure with a diversifying alternative strategy, typically funded via leverage and collateral. Corey Hofstein argues the approach solves the classic problem of having to sell existing holdings to add alternatives, offering simpler, transparent building blocks for advisors and smaller institutions while acknowledging leverage, liquidity, and correlation risks.

Main Topics: What return stacking is (Priority: 5/5): Return stacking means placing an alternative return stream on top of core stock or bond exposure so investors can keep their strategic allocation while adding diversification. Portable alpha and institutional origins (Priority: 4/5): Hofstein frames return stacking as a retail-friendly version of portable alpha, a concept long used by institutions but now packaged into ETFs. Why 2008 mattered (Priority: 5/5): The discussion revisits how leveraged portable-alpha trades failed in 2008 when hedge-fund bets were not truly uncorrelated and liquidity vanished, preventing rebalancing. How RSST works (Priority: 5/5): The flagship ETF combines U.S. equities with managed futures, using futures, swaps, Treasuries/T-bills as collateral, and systematic trend-following on top of equity exposure. Portfolio construction and use cases (Priority: 4/5): The fund suite is designed as building blocks for advisors and institutions who want alternatives without sacrificing core exposure, especially in 60/40 portfolios. Product suite expansion (Priority: 3/5): The managers describe five launched ETFs, more planned products, and a roadmap of additional combinations such as bonds plus merger arbitrage or stocks plus commodities. Performance and market demand (Priority: 4/5): Hofstein says the strategy is delivering as designed, even though managed futures can lag in strong equity markets, and notes growing investor interest in derivative-based ETFs.

Key Arguments: Return stacking is an accessible, ETF-packaged version of portable alpha that lets investors overlay alternatives on top of existing stock and bond exposure. Leverage is not inherently the problem; the historical failure mode is leverage combined with concentration risk and illiquidity, as seen in 2008. Managed futures are a good fit for stacking because they are systematic, diversified across asset classes, and can adapt in crisis periods by taking long/short positions. The product is meant to be a transparent building block, not necessarily the mathematically optimal portfolio, because simplicity improves usability and adoption. Investors should not have to sell core holdings to access alternatives; return stacking reduces the opportunity cost of diversification. Institutional investors already do versions of this trade, but ETFs make it available to smaller institutions, advisors, and model portfolios without heavy operational burden. The strategy is expected to underperform in some bull markets, but it aims to add value over full cycles and especially during major drawdowns.

Data Points: Number of launched ETFs: 5 - Corey Hofstein said the firm has five ETFs in the suite. Assets raised in suite: just over $750 million - Hofstein said the suite has raised this amount since launch. First product launch date: February 2023 - He referenced the launch timing of the first product. RSST launch timing: last November - Used when discussing the flagship fund’s performance since launch. S&P 500 performance since RSST launch: north of 25% / close to 28% - The hosts and Hofstein cited strong equity-market gains over the period. Managed futures performance over same period: flat to negative - Hofstein said the managed futures category was roughly flat to negative. RSST performance since launch: close to 20% - He compared the fund’s return to the S&P and managed futures category. Buffered ETF market size: over $50 billion - Eric Balchunas noted the size of buffered ETFs as a comparable derivatives-based category. Share of ETFs launched year to date with derivatives: over 50% - Balchunas cited this as evidence of a major shift in product design. Desired equity exposure example: $1 of managed futures + $1 of core equity exposure - Hofstein described the dollar-for-dollar stacking design used in RSST. Collateral example: 75 cents of large-cap equity exposure plus T-bills collateral - He explained one implementation detail of how the exposure is assembled.

Pivotal Quotes: "All return stacking really is, is this idea of taking a return stream of an alternative investment or asset class or strategy and putting it on top of your traditional core stocks and bonds." — Corey Hofstein: Definition of return stacking. "Leverage amplifies the good and the bad." — Corey Hofstein: Explanation of why leverage can help or hurt depending on how it is used. "Diversification is typically addition through subtraction." — Corey Hofstein: His argument that traditional alternatives require selling core holdings, which return stacking aims to avoid.

Implications: Return stacking could broaden access to institutional-style portfolio construction, especially for advisors and smaller institutions. If adoption grows, ETFs may increasingly function as modular portfolio tools that combine core exposure, alternatives, and downside-aware strategies.