Corey Hoffstein on Managed Futures and Yield Stacking
I recently had the good fortune to meet Corey Hoffstein, co-founder and CIO from Newfound Research, to discuss return stacking and return stacking models, a more unique approach to investing in stocks, bonds and alternatives that can provide more traditional beta-like returns while generating alpha from managed futures or other alternatives.
Hoffstein explained that stacking returns allows for a new approach to the type of investment strategies that institutional investors have used over the past four decades. It allows investors to seize alpha opportunities without being at the expense of beta allocations.
“The whole basic concept was to say ‘we don’t have to make this trade-off between one or the other: we can have our beta and also have our alternatives and our diversifiers,'” Hoffstein explained. . “None of this was really available to retail investors unless they had margin accounts, which tended to be expensive. [due to the margin/cost of borrowing being expensive], or if they were unwilling to trade futures, which some are; most are not.
Yield stacking allows for a newer approach to the traditional 60/40 that seeks to stay invested in the globally diversified risk premium allocations of stocks and bonds that will continue to lead the markets over the long term, but make room within the portfolio to also allocate for inflation volatility. What the traditional 60/40 portfolio is particularly sensitive to.
The return stacking concept can be thought of as a 60/40/+, in which a 60/40 return stacking model is achieved through an investment in a fund such as the WisdomTree U.S. Efficient Core Fund (NTSX)a ETFs which invests in both US large cap stocks as well as US Treasury futures and increases capital efficiency for a portfolio.
Thanks to the use of a leverage effect of 1.5x per NTSX provide 60% equity and 40% US Treasuries to the portfolio by allocating 2/3 of portfolio assets to NTSXthe performance of NTSX attribution mimics Vanguard Balanced Index Fund Investor Stocks (VBINXName), Vanguard’s US 60/40 fund. At the same time, 1/3 of portfolio assets are freed up for alternative allocations, such as managed futures.
In the current environment, some advisors might look to commodities for this remaining allocation, but due to their heavy weighting to energy and positive return potential which is strongly tied to inflationary periods and nothing else, Hoffstein doesn’t see them as an ideal option for investors in all environments.
There might be a temptation to look at managed futures contracts and iMGP DBi Managed Futures Strategy ETFs (DBMF) as a return set in a return stacking pattern that uses NTSX and DBMF, given its outperformance this year (the fund’s year-to-date return is currently 30.49% as of 6/14/22 according to the website). For Hoffstein, the inclusion of managed futures and DBMFin particular, it is so much more.
“If you look at historically managed futures contracts, whether you only look at the individual rounds like rate trend, stock trend, commodity trend, currency trend, what you see, that is that they perform well historically in inflation and deflation environments,” Hoffstein said.
The big appeal of managed futures funds is their option in many different spaces, including long and short commodity positions, long/short interest rate positions, and long/short currency positions such as than the US dollar. Due to the number of futures contracts managed in the markets, they can react better to the specific type of inflation that occurs.
DBMF in particular is attractive for a return stacking model because it avoids the dispersion that is common in managed futures hedge fund performance, Hoffstein explained. It does this by looking to track the average performance of existing hedge fund strategies, drawn from 20 of the largest managed futures hedge funds using performance data from SocGen. call to action Hedge fund index, eliminating the biases and performance outliers that can arise from following a single issuer strategy.
“What I like about this DBMF tries to achieve, and has historically achieved, gives you a highly correlated return stream to the broad index and completely eliminates the underlying fees associated with hedge funds,” Hoffstein said. “You can really think about capturing the index plus 150 or 200 basis points over time because you’re eliminating a lot of that cost.”
Hoffstein compares investing in DBMF as a managed futures option to invest in the S&P 500 as an equity option due to its low cost for the exact type of exposure desired. This is a solid core allocation for managed futures and helps bridge the gaps in inflation volatility found in traditional 60/40 portfolios.
Newfound Research also uses DBMF in some of its portfolio models.
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