Return Stacking with Corey Hoffstein and Rodrigo Gordillo

Episode Summary

Executive Summary: The episode explains “return stacking,” a capital-efficient way to combine multiple return streams—such as equities, bonds, managed futures, and global macro—using disciplined leverage rather than replacing a 60/40 portfolio. Corey Hofstein and Rodrigo Gordillo argue this can help investors improve expected returns, preserve diversification, and manage behavioral pain from traditional alternatives in a low-return environment.

Main Topics: Why 60/40 may face lower future returns (Priority: 5/5): The guests argue that high equity valuations and low bond yields make the forward-looking return profile of a traditional 60/40 portfolio less attractive than in the past. Return stacking vs. leverage (Priority: 5/5): They reframe leverage as 'return stacking' to make the concept more intuitive: combining distinct return streams rather than simply borrowing risk. Using futures and capital efficiency (Priority: 4/5): The discussion shows how futures overlays can free capital to be allocated into other assets, effectively stacking bond or alpha exposures on top of core beta. Diversifying with managed futures and global macro (Priority: 5/5): The guests highlight that low-correlation strategies can be added on top of a 60/40 allocation to improve expected returns and drawdowns without abandoning the core portfolio. Rebalancing premium and non-correlation (Priority: 4/5): They argue that rebalancing across genuinely uncorrelated assets can create a meaningful return boost, unlike rebalancing among highly correlated stocks. Costs, taxes, and behavioral realities (Priority: 4/5): They acknowledge fee and tax considerations, but say the larger issue is investor aversion to leverage and the difficulty of adopting alternatives that underperform for long stretches. Portfolio structure as a source of alpha (Priority: 4/5): The guests emphasize that there may be more opportunity in how portfolios are built—what is stacked, when, and how—than in security selection alone.

Key Arguments: The 60/40 portfolio had an unusually favorable starting point in the early 1980s, with high real rates and cheap equities, but that backdrop no longer exists. Bond yields are a strong predictor of future bond returns, so low current yields imply subdued future bond returns for a large part of the 60/40 mix. Return stacking uses leverage to add a second return stream on top of a core portfolio, ideally from assets with low or negative correlation to stocks and bonds. A 60/40 portfolio levered to 1.5x can be thought of as roughly 90% equities plus 60% bonds, not as a reckless all-in leverage bet. Managed futures and systematic global macro can provide positive long-term expected returns with relatively modest drawdowns, but they are hard to own when they require selling stocks and bonds to fund them. Stacking low single-digit return streams on top of a 60/40 can meaningfully lift total returns while keeping tracking error and drawdowns tolerable. Rebalancing between truly uncorrelated, volatile asset classes can generate a positive rebalancing premium; the guests cite roughly 3% to 4% in futures-based implementations. Tax efficiency depends on structure: some overlays are tax-inefficient (e.g., equity futures over bonds), while others can be more favorable (e.g., equity exposure held directly with Treasury futures overlay). The approach is meant to be flexible, not prescriptive: investors can tailor the stack using Treasuries, corporates, CTA, macro, tail hedges, or even cash held for opportunistic buys. Behaviorally, investors are more likely to adopt improvements to a familiar 60/40 than to fully replace it with an all-weather or pure risk parity portfolio.

Data Points: 60/40 leveraged exposure example: 1.5x - A levered 60/40 portfolio was described as a simple example of return stacking. Equity/bond split in 1.5x 60/40: 90% equities + 60% bonds - Illustrative translation of a 1.5x levered 60/40 portfolio. Early 1980s backdrop: High real interest rates and very cheap equity valuations - Described as the best historical starting point for 60/40-like portfolios. 10-year realized Sharpe ratio: One of the highest ever for U.S. 60/40; close for global 60/40 - Used to highlight how strong the recent run has been. Required allocation to target 7.5% return in 1995: 100% bond portfolio - Shows how attainable return targets once were from safe assets. Required allocation to target 7.5% return by 2015/2020: ~90% risk assets and ~10% fixed income - Illustrates how return targets became riskier to achieve over time. Treasury futures collateral example: 10% capital supporting 100% exposure - Example of capital efficiency through futures overlays. Managed futures drawdown: 10% to 15% max drawdown - Approximate drawdown range cited for the SocGen CTA trend index over the last 15-20 years. Stacked portfolio outperformance frequency: 18 out of 21 years - Backtest result cited for the stacked portfolio versus 60/40. Long-term excess return from stacking: Just under 4% - Reported magnitude of the stacked return added on top of the base portfolio. Rebalancing premium in futures space: 3% to 4% - Claimed achievable premium even if grouped futures bets average zero return. Managed futures / CTA exposure in example portfolio: 30% CTA and 30% global macro - Example allocations used in the paper to demonstrate stacking. Treasury overlay tax treatment: 60% long-term / 40% short-term - Described for Treasury futures structures. Tracking error sensitivity: Relatively small - The stacked portfolio reportedly had low tracking error versus 60/40 while improving returns and risk-adjusted results.

Pivotal Quotes: "“return stacking is a much more approachable way to think about this”" — Corey Hofstein: Explaining why the term was chosen over 'leverage'. "“If you can find asset classes or investments that are truly non-correlated to each other and have some volatility... you are able to create a portfolio”" — Rodrigo Gordillo: Describing the logic behind the rebalancing premium and diversification. "“I think there’s a lot more alpha to be created over time in portfolio structure.”" — Corey Hofstein: On why portfolio design may matter more than security selection.

Implications: For investors, the message is to improve a familiar portfolio rather than abandon it: use capital-efficient overlays, diversify return streams, and think carefully about taxes and behavior. For the industry, the paper supports a shift from product silos toward modular portfolio construction.