Talk Your Book: Return Stacking

Episode Summary

Executive Summary: Corey Hofstein explains return stacking as a way to solve the diversification problem by using liquid leverage to keep core stock/bond exposures while adding alternative return streams on top. The discussion covers why diversification is hard behaviorally, how ETFs enabled the strategy, when it can go wrong, why managed futures matter, and why distribution and simplicity are crucial for product success.

Main Topics: Return stacking as a diversification solution (Priority: 5/5): Hofstein frames return stacking as a way to add diversifiers without selling core holdings, allowing investors to keep stocks and bonds while layering on additional return streams. Behavioral barriers to diversification (Priority: 5/5): The conversation emphasizes that diversification is difficult because investors must sell familiar, low-cost, transparent assets to fund alternatives, creating a high emotional and practical hurdle. How the strategy works mechanically (Priority: 5/5): Corey explains that the structure uses leverage through futures contracts, with the ETF holding liquid assets and futures exposure to create additional portfolio exposure efficiently. Managed futures as a stacking asset (Priority: 4/5): Managed futures are discussed as a key diversifier that can be stacked on top of core portfolios to help with inflation, trend, and macro regime risk. Risks and failure modes (Priority: 5/5): The main risks are leverage, concentration, and illiquidity; the strategy works best only when stacked assets are liquid and genuinely diversifying, not just more risky beta. Product design, ETF wrappers, and distribution (Priority: 4/5): The interview highlights how ETF rules and better product packaging made the strategy accessible, and how distribution, communication, and simplicity matter more than raw investment brilliance. Business lessons for asset managers (Priority: 4/5): Hofstein reflects that running an asset management firm is primarily a business challenge: ideas alone are not enough without product-market fit and a clear distribution plan.

Key Arguments: Diversification is universally desirable, but investors rarely add it because they must fund it by selling assets they already understand and trust. Return stacking solves this by using capital efficiency and leverage to preserve core allocations while adding an incremental return stream on top. Futures-based leverage can be structured prudently when liquid assets are matched with liquid assets, reducing the risk of forced deleveraging. Managed futures can be useful because they have positive expected returns, can diversify equity/bond risk, and may help in inflationary or macro-volatile regimes. The post-2008 era hurt trend following because central-bank intervention suppressed trends; rising macro volatility has helped revive the strategy. The biggest risk is misusing the freed-up capital to simply increase risk concentration, such as adding Bitcoin or Nasdaq exposure, which turns the structure into plain leverage. ETF regulation, especially Rule 18f-4, helped make these structures feasible for retail and advisor use. In asset management, communication, simplicity, and distribution matter more than brilliance; complex strategies without a clear market path often fail.

Data Points: Newfound return stacking ETFs launched: 3 funds - Corey says the firm launched three funds last year. Combined assets in the three funds: above $200 million - Reported as current AUM across the launched funds. Return Stacked Global Stocks and Bonds ETF (RSSB) AUM: $75 million - Launched in December; AUM after roughly 3-4 months. Return Stacked Stocks and Managed Futures ETF AUM: $75 million - Launched last September; AUM after about 6 months. Return Stacked Bonds and Managed Futures ETF AUM: just over $50 million - AUM for the bonds-plus-managed-futures fund. Example portfolio exposure: $1 invested gives $1 of global stock exposure plus $1 of treasury exposure - Describes the RSSB target structure. Potential portfolio sizing example: 10% - Example where an investor sells 10% stocks and 10% bonds to buy 10% of the stacked ETF. Managed futures return in 2022: up 25% - Used to illustrate how stacking a strong diversifier can add to a portfolio. Typical managed futures volatility: 13-14 vol - Referenced when describing the managed futures component in the stocks-plus-managed-futures fund. Resulting fund volatility: around 19% - Approximate volatility of the RSST product. Managed futures AUM peak: about $300-$350 billion - Approximate size of the category after post-2008 inflows. ETF regulatory rule: 18f-4 (VAR rule) - SEC rule cited as enabling clearer derivative usage in ETFs and mutual funds.

Pivotal Quotes: "The core concept of return stacking is trying to solve a diversification problem." — Corey Hofstein: He defines the purpose of the strategy at the start of the interview. "This is leverage without a margin call." — Corey Hofstein: He summarizes the intended risk structure of liquid-liquid stacking inside ETFs. "Running an asset management firm is a business and having a good investment strategy is only just one small piece of running that business." — Corey Hofstein: He reflects on entrepreneurship, distribution, and product-market fit.

Implications: Return stacking may broaden access to diversification for advisors and investors, but only if they use it to add truly uncorrelated, liquid return streams rather than simply increase risk. The bigger lesson: product packaging and distribution can matter as much as the underlying strategy.