The Concept of Return Stacking with Corey Hoffstein

What would YOU like to hear about on Bloomberg? Help make shows like ours even better by taking our Bloomberg audience survey https://url.avanan.click/v2/r01/___https://bit.ly/4eIFhe5___. YXAzOnJ3czphOmc6MjNiM2JiNmFlZTc1Y2UzZDhjZGNiMGY4OTRlMDc3ZjE6Nzo3YTY2OjgwNjEwYzM4MGYyMDAxNDZhNjY1NDViYzM1NmYxMGQ0MTQxYmYwYWM5NmUyOTlmNWE4Zjg1NGJmN2E1ZmVmNjc6aDpUOk4. Barry Ritholtz speaks with Corey Hoffstein, CEO and CIO of Newfound Research. Corey pioneered the concept of 'return stacking' and is one of the masterminds behind the Return Stacked ETF Suite, which manages roughly $750 million across five ETFs. Corey's work has been published in the Journal of Indexing and the Journal of Alternative Investments. He is also the host of the popular podcast on quantitative investing "Flirting with Models." On this episode, Barry and Corey discuss the creation of Newfound Research, what it takes to launch an ETF, and how return stacking actually works. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:05Speaker 02

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 1:12Barry Ritholtz?

  This week on the podcast, another extra special guest. Corey Hoffstein is one of these really fascinating quants who has just a really interesting background. Not only did he stand up a research shop from a dorm room in college and started selling model portfolios to fund managers, but eventually created a suite of first mutual funds and then ETFs, really pioneering the concept of return stacking. People have described that in the past as portable alpha. He does some really, really interesting research and gets deep into the weeds on things like

• 1:57Barry Ritholtz?

  market structure, liquidity cascades, what really drives returns, how much should you be focused on alpha versus beta? But most fascinating of all, he is one of those rare quants who has the ability to take Complex, sophisticated, quantitative topics and make them very understandable for the average investor. If you're at all interested in concepts of things like portable alpha, return stacking, or just want to know how a quant looks at the world of investing and tries to decide

• 2:38Barry Ritholtz?

  where there are opportunities, I found this conversation to be fascinating and I think you will also. With no further ado, newfound research and returned stacked ETF suites, Corey Hoffstein. Corey Hoffstein, welcome to Bloomberg.

• 2:55Speaker 04

  Barry, thank you for having me. Very excited to be here.

• 2:57Barry Ritholtz?

  I'm excited to chat with you about things besides watches and cars and real estate. Let's talk a little bit about your background. You get a BS in computer science from Cornell, a master's in computational finance from Carnegie Mellon. Quantitative investing, was that the plan from the beginning?

• 3:17Speaker 04

  Absolutely not.

• 3:18Barry Ritholtz?

  Really?

• 3:19Speaker 04

  No, I grew up in the Super Nintendo generation, so I thought as a young man that I was going to make video games for a living.

• 3:25Barry Ritholtz?

  Get out, really?

• 3:26Speaker 04

  I did, and I taught myself to program when I was 12. And all throughout late middle school and high school, I was programming games for my Game Boy and developing game engines for the computer. I wrote my own programming language. I really thought I was on a path to go make video games for a living.

• 3:43Barry Ritholtz?

  What was your game of choice as a kid?

• 3:45Speaker 04

  I was a big Zelda fan.

• 3:47Barry Ritholtz?

  Okay.

• 3:48Speaker 04

  I really was. And it's funny, I haven't played video games in probably over a decade.

• 3:52Barry Ritholtz?

  Same. And the really funny thing is, so here's the age difference. I remember sneaking out of high school during lunch with a buddy to go to the mall to first start playing Space Invaders, then Galaxa, then Missile Command. Like, these are all retro games. And then, when I started as a trader, Tuesday nights, the quote server would be taken offline and it would become a quake server. And we spent, and you just get lost in it, and suddenly it's 11 o'clock and, oh my God, I missed dinner. But that's really fascinating. Why didn't you become a game programmer?

• 4:29Speaker 04

  As you mentioned, I ended up at Cornell for computer science. And as much as I loved the curriculum, I looked around at the people I was in my classes with and I said, Oh, I don't, I don't know if this is whom I want to spend, with whom I want to spend all of my time.

• 4:43Barry Ritholtz?

  That's hilarious.

• 4:45Speaker 04

  In a cubicle, as it turns out, I like talking to people, I like interacting, and I just sort of grew and evolved from there. Um, this was the era, 2005, 2006, all of my friends were looking to get banking roles, everyone wanted to go work on Wall Street. And so I sort of caught the bug and saw, oh, there's this really interesting thing I'm learning about called quant.

• 5:04Barry Ritholtz?

  Right.

• 5:05Speaker 04

  And I, and I really liked the application of math and statistics and computer science to markets, and I just caught the bug. And that's where I said, okay, I think that's where I want to spend my career. And so graduating right into 2009, right out of the financial crisis, I said, I don't think I'm going to get a job. Let me see if I can go to grad school, continue this education, and that's how I ended up at Carnegie Mellon.

• 5:27Barry Ritholtz?

  So let's talk a little bit about the timing there. You're Cornell 06 to 09, you're Carnegie Mellon 09 to 11, but you start Newfound Research in 08? Were you, what was this, a dorm room launch?

• 5:41Speaker 04

  It was.

• 5:42Barry Ritholtz?

  Is this the next Dell computer?

• 5:43Speaker 04

  It was, it was very accidental. I never actually intended to still be running this business 16 years later, truthfully. I named it Newfound after a lake my family used to visit in New Hampshire. It was truly a throwaway name. But in college, I was working on some quantitative research models and happenstance, we were talking about luck earlier, got introduced to a local asset manager outside of Boston who saw what I was working on and said, this is really interesting, would you license these models to me? I'm a broke college student who needs some beer money.

• 6:14Barry Ritholtz?

  Oh yeah, for sure.

• 6:15Speaker 04

  And, um, and he said, I don't have any cash to pay you with, but I'll pay you in basis points. I did not know what a basis point was. I said, sure, man, whatever, I'm going to grad school.

• 6:26Barry Ritholtz?

  But, by the way, most college kids pay for beer money through quantitative model development.

• 6:30Speaker 04

  That's right.

• 6:31Barry Ritholtz?

  I mean, I think that's a generational thing, and, and why not?

• 6:35Speaker 04

  Why not?

• 6:35Barry Ritholtz?

  I don't know what a basis point is?

• 6:37Speaker 04

  I didn't, I didn't even know what a basis point was. And so we, we get this contract written and I go off to grad school, assuming I would go work at a big bank, doing sales and trading in some quant role, and he ended up... Running a strategy based on my research models that went from zero to several billion dollars.

• 6:57Barry Ritholtz?

  Get out of here.

• 6:58Speaker 04

  And

• 6:58Barry Ritholtz?

  Couple of basis points on that is a lot of beer.

• 7:00Speaker 04

  Started to add up and it afforded me the opportunity. It was interesting because this was a big transition time in Wall Street where

• 7:06Barry Ritholtz?

  Yeah.

• 7:06Speaker 04

  A lot of the jobs I had been trained for. When I, when I went through that graduate school program, who by the way, today looks nothing like the program I went through.

• 7:14Barry Ritholtz?

  Mm hmm.

• 7:14Speaker 04

  It was all about pricing credit default swaps.

• 7:17Barry Ritholtz?

  Right.

• 7:18Speaker 04

  No one trades credit default swaps anymore. So I'm looking on the other side of this and I'm seeing all the jobs I wanted to apply for disappear.

• 7:25Barry Ritholtz?

  Right.

• 7:26Speaker 04

  And my father was an entrepreneur. I always had the idea that I would do something entrepreneurial and I said, you know, young, naive, brash, 20 year old, I said, well, I got a business that's already paying me. Why don't I just keep doing this? And that's where the journey began.

• 7:40Barry Ritholtz?

  Right out of grad school, you just continued. Did you even look at jobs? Did you apply places?

• 7:45Speaker 04

  I did not.

• 7:45Barry Ritholtz?

  You just said, ah, I could be my own boss.

• 7:48Speaker 04

  That's what happens in your early twenties. You have that sort of brash arrogance.

• 7:52Barry Ritholtz?

  That, that, that's amazing. So, so you have this one set of models. It's generating revenue. What was the next step? How did you turn this into a sort of quirky idea that is creating a little bit of revenue into an actual business?

• 8:07Speaker 04

  Yeah. So that was, that was a lot of stumbling in the dark candidly. So on the other side of that contract is I got paid basis points, but I had a confidentiality agreement with this firm. And so as those assets grew, I'm now a young 20 year old going out, trying to go to other asset managers saying, hey, I have this quantitative research. It helps power billions of dollars of decisions. And they'd say, well, who are your clients? And I say, I can't tell you.

• 8:32Barry Ritholtz?

  You gotta trust me on this.

• 8:33Speaker 04

  And you gotta trust me. And as, you know, again, a young 20 year old, I'm sure I got laughed out of a lot of offices. And there's a very long story here that's better told over beers. But as it turns out, the reason that asset manager was able to raise so much money was because they had taken signals I had sent them, turned them into, ran a back test.

• 8:56Speaker 04

  Miscalculated that back test and then ran around telling everyone it was a live strategy.

• 9:01Barry Ritholtz?

  Oh, really?

• 9:03Speaker 04

  So.

• 9:03Barry Ritholtz?

  That sounds like trouble.

• 9:04Speaker 04

  Sounds like trouble. So throughout 2013, I was doing a lot of this research. I had sort of started to move into more sub-advisory index provider roles and all of a sudden SEC comes knocking. And by the way, at that point, that client was at $13 billion.

• 9:20Barry Ritholtz?

  Wait, so you're you just provide the model. You have nothing whatsoever to do with how they marketed, who the clients are, how they run it. It's just a model.

• 9:28Speaker 04

  Yes. And by and by the agreement, I wasn't I wasn't even supposed to be in the equation at all. I'd never been introduced. No one knew who I was. Somehow no one in due diligence ever asked them about any of this.

• 9:39Barry Ritholtz?

  Right.

• 9:40Speaker 04

  Uh, and so $13 billion firm gets a knock from the SEC and the SEC says, okay, you're calling this a live track record. Show us the audit.

• 9:48Barry Ritholtz?

  Show us the trades, right. And it only goes back to 09.

• 9:51Speaker 04

  And you can imagine everything unraveled from there. And so in 2013, I'm staring down my largest client. All of a sudden it becomes obvious. This is fraud. Now, by the way.

• 10:01Barry Ritholtz?

  How did the fund actually perform when it was live?

• 10:06Speaker 04

  Quite well. I mean, that's why I gathered so many assets.

• 10:08Barry Ritholtz?

  So that's the crazy thing is what led the SEC, because normally the SEC gets called in when somebody's losing money and they're pissed, not, hey, we're making money, but I'm not sure I love this marketing.

• 10:20Speaker 04

  Just a routine exam. You know, you run an RIA, the SEC just comes knocking every once in a while to say, hey, just want to make sure the compliance programs all set up. It happens every once in a every couple of years. And and at that point, they were due for their routine exam. They had gone from nothing to 12 billion. It was time for the SEC to come.

• 10:34Barry Ritholtz?

  Right.

• 10:35Speaker 04

  Kick the tires with what should have been a very routine.

• 10:38Barry Ritholtz?

  Right.

• 10:38Speaker 04

  This is, you know, dot the i's, cross the t's. Oh, no, turns out you've got a fabricated track record that, by the way, you miscalculated your back test and it's an inflated fabricated track.

• 10:48Barry Ritholtz?

  Well, that's really a problem, isn't it?

• 10:50Speaker 04

  That's really a problem.

• 10:50Barry Ritholtz?

  Did they ever come knocking to you and said, hey, we, uh?

• 10:54Speaker 04

  It wasn't just knocking because what happened is.

• 10:57Barry Ritholtz?

  Ooh, that subpoena is frightening, isn't it?

• 10:59Speaker 04

  Uh, it was a subpoena. And as a 20, I guess I must have been 23, 24 at the time, getting a subpoena from the SEC.

• 11:05Barry Ritholtz?

  That'll wake you up.

• 11:07Speaker 04

  Yeah, that'll, that'll.

• 11:08Barry Ritholtz?

  Skip the ice coffee, go right to the subpoena.

• 11:11Speaker 04

  And, and the gentleman who ran the firm, that was my client, was, was so convincing to the industry that he had done nothing wrong.

• 11:18Barry Ritholtz?

  Right.

• 11:19Speaker 04

  During the SEC investigation, he grew the business from 12 billion to 25 billion.

• 11:24Barry Ritholtz?

  Get out of here.

• 11:26Speaker 04

  Yes.

• 11:27Barry Ritholtz?

  Wow.

• 11:27Speaker 04

  Yes. And so during that time.

• 11:29Barry Ritholtz?

  And that's even more basis points.

• 11:30Speaker 04

  Oh, they stopped paying me at that point.

• 11:32Barry Ritholtz?

  Oh, they did?

• 11:32Speaker 04

  They stopped paying me. Needless to say, the SEC ran a very aggressive investigation. I got subpoenaed, my life got caught up in this SEC investigation, and I said, alright, I've got two choices. I can leave this industry and go, go move to Silicon Valley. I got a computer science degree.

• 11:49Barry Ritholtz?

  Right.

• 11:49Speaker 04

  There's some good stuff going on out there. Or I can plant my flag and prove to people I did nothing wrong.

• 11:55Barry Ritholtz?

  Right.

• 11:55Speaker 04

  There's quality research here. And so that's actually when I started blogging. I started writing a weekly research, quantitative research report, just to say, hey, look, there's, there's something real here. Had a couple of employees, we started publishing our research, getting out there more, and slowly use that to transition to be, you know, we were more active on social media, started the podcast a few years later, just to try to say, there's no, there's nothing, there's no fraud here. We were not the problem.

• 12:25Barry Ritholtz?

  Hey, it's just a model and we get, we sold it to them.

• 12:28Speaker 04

  Exactly.

• 12:28Barry Ritholtz?

  The problem is what they did with it. How did the SEC investigation resolve with you guys?

• 12:34Speaker 04

  No issues.

• 12:35Barry Ritholtz?

  Right.

• 12:35Speaker 04

  Right. So they, they, I mean, anyone who's gone through this, though, I suspect the vast majority of people have not, you eventually, the SEC never says, you're.

• 12:42Barry Ritholtz?

  Alright, you're okay. They just stopped calling.

• 12:45Speaker 04

  They stopped calling and, and then you ask for a letter that says, hey, can I get some resolution? And they say, we've determined we're, you know, we're not pursuing further inquiries into you. And so I've got a nice letter framed from the SEC that, that says precisely that. So.

• 12:58Barry Ritholtz?

  Framed. Framed on the wall.

• 13:00Speaker 04

  Yeah. The, the other side did not end so well, as you can imagine. They were bankrupt a year later and 25 billion dollars flew out to the wind.

• 13:08Barry Ritholtz?

  Wow. So that's an amazing story. I had no idea about that. I wanna just go back a little bit to Carnegie Mellon. You graduate with this quantitative background.

• 13:23Barry Ritholtz?

  You went into your own shop. What did your classmates do? Where did they go?

• 13:27Speaker 04

  They went all over. A lot of them went to big banks. A lot of them went to buy-side hedge funds. Some of them went to places like Citadel to trade. Yeah, become options market makers. I mean, they really, when you, when you talk about what is quant, right? What you, what you learn, you learn everything from how to price structured products. You learn the math that can help you with, with market making operations. You learn the technology. It's a really broad field. And so what ends up happening is people just sort of scatter to all parts of the industry.

• 14:01Barry Ritholtz?

  Huh. I know you are not especially keen on backtesting.

• 14:07Speaker 04

  Well, now, definitely not keen on it.

• 14:08Barry Ritholtz?

  So here's the question. How much did this experience affect the way you look at backtesting? Honest backtesting, really looking at the numbers versus exaggerating returns and, and making up the claim that something's live when it's not?

• 14:26Speaker 04

  I think my view of this has changed over time. I've become, I've always been very skeptical of backtests for all the reasons quants normally are. I think quants perhaps did a disservice to this industry in making it easier to show people backtests.

• 14:40Barry Ritholtz?

  Right.

• 14:41Speaker 04

  I have a theory, unfounded, no one's ever confirmed this, but I always sit around and wonder, why does BlackRock pay MSCI so much money in indexing? You know, when BlackRock could clearly run all these strategies themselves, but they-

• 14:54Barry Ritholtz?

  You have a historical track record and it's, that's life, really.

• 14:57Speaker 04

  FINRA, FINRA, one of the other regulators prohibits you from showing a backtest for a mutual fund or an ETF. But if it's an indexed ETF, which is a regulatory term, if it's truly an indexed ETF, you are allowed to show the index, presuming it's a third-party index provider. So what BlackRock can do is say, this is an indexed ETF. It's indexed to this MSCI or S and P smart beta product. And by the way, here's the 30-year backtest. And of course, that backtest outperforms the market. And I think that helped fuel the smart beta boom of the 2010s. And, and so I don't think there's anything implicitly wrong with backtests if done well. I think the problem is backtest became a marketing tool.

• 15:36Barry Ritholtz?

  Yeah, no doubt about it. And the SEC rules on backtests have just changed. To the point that when I show a chart of the S and P 500 or VTI, like I have to be really circumspect in how I describe it. Here's how the total market return has performed over the past 30 years. That's about the most I can say versus, hey, you know, if you have a portfolio with A, B, C, D, E, here's what you can expect. Like the pushback we've gotten on some marketing materials kind of surprised me. I understand they're trying to create like a big no fly zone

• 16:17Barry Ritholtz?

  to avoid the sort of problems that the guy who abused your model did. But it's kind of like, aside from the fact that past performance isn't necessarily relevant to what the world's going to look like in the future. That's, um, that's a very different thing than, wait, I can't just show a chart? I don't understand.

• 16:35Speaker 04

  Well, and I'm sympathetic to the, to the point that a lot of clients, whether they're advisory clients or my clients who would be advisors and institutions will ask the question, okay, well, how would this have performed during these different market stress scenarios? And that's what a back test would in theory show you. And not being able to tell them or show them makes it harder for them to do due diligence to understand how it may have behaved. Right? And so there are ways in which I think back tests can be used appropriately. I understand the blanket no from FINRA and I understand the SEC's position on it because it can be used in such a manipulative fashion. But I do think it makes it

• 17:12Barry Ritholtz?

  It's easy to abuse.

• 17:14Speaker 04

  It makes it hard to do thoughtful due diligence in certain cases.

• 17:17Speaker 00

  At KKR, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance and sports, KKR has built the experience to navigate complexity, the judgment to recognize opportunity and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything.

• 17:42Speaker 00

  KKR, understanding what matters. Visit kkr.com/whatmatters.

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• 18:24Barry Ritholtz?

  I'm trying to get a sense of how your investment philosophy developed. I recall reading that you were developing a stock screener and you were focused on value-based models and discovered that they would get just as shellacked during downturns as the growth stocks did. Tell us a little bit about how screening led you to develop your philosophy and what your thoughts are on momentum and trend.

• 18:52Speaker 04

  So very early on in my career, again, I was doing a lot of this on my own. I sort of self-discovered factor investing and was basically using statistical screens to try to find cohorts of stocks that would behave in different ways.

• 19:09Barry Ritholtz?

  And just to clarify, when you say factor investing, we're really talking about pharma-french factors, not necessarily smart beta-type stuff?

• 19:17Speaker 04

  All of the above. All of the above. I didn't even know what it was at the time. I was just trying to say, hey, if I find a basket of stocks and all the CEOs are balt, how does that behave? Right? Versus, oh, these all have positive momentum.

• 19:29Barry Ritholtz?

  I got a great ticker for that ETF.

• 19:31Speaker 04

  Yeah, balt. I don't think anyone's used it yet. So I was looking at all sorts of things, which is sort of classical equity quant type work. And I've always sort of had a tilt, just personality wise, towards capital preservation. And there was one conversation very early in my career, this was actually 2007, where I was interviewing with an asset manager and I, pre-meeting, asked them what they thought of the market. And he gave me the most bearish prognostication I had ever heard.

• 20:01Barry Ritholtz?

  Uh huh.

• 20:02Speaker 04

  And again, I was very early in my career. I didn't live through the dot com fallout from a career perspective. I said to him, "Well, what are you gonna do?" And he was a small cap value manager. And he said, "Nothing. My job is to provide small cap value exposure. Uh, if it's not appropriate for, for the client, the financial advisor should make that decision." And so I said, "Well, I talked to some financial advisors and they said, 'Well, how in the world should we know when to take our clients out of small cap value? That's the manager's job.'" And I said, "Well, in my opinion, no one's protecting my capital here." And so I started really looking into statistical models that I thought could help preserve capital on the downside. Value had worked incredibly well in the dot com era, but my, my thought there was there

• 20:46Speaker 04

  was nothing inherent in value itself that was necessarily protective in terms of the type of crisis that could unfold. And so I ended up discovering trend following and following in love with trend following, which is the idea that, and it sounds naive, but as prices have historically gone up, they tend to persist in that direction, or if prices start to fall, they tend to persist in that direction. And there's a little bit of a statistical edge you can use there to try to really clip your downside risk.

• 21:14Barry Ritholtz?

  The, the challenge is always the transition from the uptrend to the downtrend, which is why you have portfolio managers and allocators arguing who's responsible. The reality is, nobody wants that job because it's thankless and practically impossible. Very few people seem to have come up with a formula that works from one cycle to the next.

• 21:36Speaker 04

  That's absolutely right. There's very few, I would argue probably no consistent predictors of any sort of economic or market cyclicality. What you have is maybe some statistical indicators that give you a slight bit of an edge, but when you talk about just a slight bit of an edge being played on, say, a big position like the S and P 500 in your portfolio, and you're only going to play that edge realistically three or four times in your life, that's a very low breadth bet that's going to have a really big impact. It's just not smart on a math basis to do that, and it's certainly not smart from a career risk perspective.

• 22:15Barry Ritholtz?

  I'm so happy you said that because I frequently find myself wanting to respond to these claims on Twitter. Sample set of three? Who cares? You know, every time you look at the history of recessions, hey, 20th century recessions, what is it, 12, 14? Even that, not a lot of numbers. And are you saying the recession in 2020 is similar to recession in the 1950s? It's such a different world. You mentioned the dot com implosion. The reason value held up was that was such a sector collapse. What was the Nasdaq 100? Down 81, 82%? And the S and P 500 was down something like a fraction of that, I want

• 23:00Barry Ritholtz?

  to say less than half. And then the Dow held up really well, down 35%, something like that?

• 23:06Speaker 04

  Well, and if you go back to the history, it's because most of those value stocks had already sold off 40 or 50% in 99.

• 23:13Barry Ritholtz?

  Right.

• 23:13Speaker 04

  Right?

• 23:14Barry Ritholtz?

  In the late 90s, anyway. They did poorly while the money rolled into the big cap growth and technology, media and telecom exploded.

• 23:24Speaker 04

  So this story came out that, oh, value is defensive because it has this valuation buffer to it.

• 23:31Barry Ritholtz?

  In that one example.

• 23:33Speaker 04

  But people extrapolated that one example, right? They took a point and they drew a line. And then what happened in 2008? Well, most naive

• 23:43Speaker 04

  Value portfolios are stuffed with financials.

• 23:45Barry Ritholtz?

  Right.

• 23:46Speaker 04

  And, and value just got destroyed.

• 23:48Barry Ritholtz?

  Right. So, so the obvious question to someone who makes that claim is, well, how did value do in the 1970s? Not especially well. Look at the utilities, look at big oil companies. Well, but that was all about inflation. Okay, but you said this is, so it's a, it's a hedge, except when there's inflation? What, what are the other exceptions? That, I always come back to the sample set of three, sample set of five. I, I need a sample set of them. You know, let's revisit this in the year 3000, we'll have enough data. Uh, to be able to look at this.

• 24:19Speaker 04

  So I have sort of a philosophical view on this, which is if I knew that value worked to protect my capital in every single recession. And I thought the market was efficient, then I shouldn't be able to predict recessions. Cause if I can predict a recession and I know value works, then I've outperformed the market. So, you know, there's, there's an inherent limit here based on how efficient you think the market is. And I'll tell you, I, I think the market's pretty darn efficient.

• 24:45Barry Ritholtz?

  Mostly kinda sorta eventually efficient. It gets there event. What's the Benjamin Graham quote? In the short run, it's a voting machine, but in, in the long run, it's a weighing machine.

• 24:56Speaker 04

  Yep.

• 24:57Barry Ritholtz?

  That's the mostly efficient, eventually efficient market hypothesis. So, so given that, um, let, let's talk a little bit about things like portable alpha. You, you've done a lot of work in this, a lot of research. First, give us a quick definition of isolating beta and alpha. What does portable alpha mean?

• 25:17Speaker 04

  If you're all right with it, I'm actually going to answer this in a roundabout fashion by saying, what problem are we trying to solve here first and foremost? Right? And, and the problem we're trying to solve with terms like portable alpha or return stacking is what I would call the funding problem of diversification. It's a bit of a mouthful. So what do I mean by that? Uh, most clients, whether they're individuals or institutions, have some sort of benchmark. A policy portfolio, some strategic asset allocation that they start with. They're typically not starting with just a blank piece of paper. It's, uh, Mr. And Mrs. Jones, you are 60, 40 investors, 60% stocks, 40% bonds.

• 25:59Speaker 04

  But we think that we want to go beyond that and introduce diversifying assets or diversifying strategies. I'm just going to use gold as an example.

• 26:06Barry Ritholtz?

  Uh huh.

• 26:07Speaker 04

  Well, to put gold in the portfolio, it's not, it's not just addition. Diversification is a problem of addition through subtraction.

• 26:14Barry Ritholtz?

  What are you selling in order to buy the gold?

• 26:16Speaker 04

  I need to make room. And that creates two problems. The first is it creates a return hurdle problem. Whatever I'm selling, that gold in this example, needs to outperform to have that portfolio, or at least keep up with, over the long run, for that portfolio to not underperform the benchmark, right?

• 26:35Barry Ritholtz?

  So if you do that, so if you do that, you've, even if you've gotten the same performance, you've reduced the risk through the addition of a diversifying asset.

• 26:44Speaker 04

  Right, but there's a risk there. Let's say I think gold is going to keep up with stocks over the long run, so I sell my stocks to make room for gold, and it doesn't. Turns out my forecast is wrong. Well, there's a real opportunity cost there, right? So you've got, you've got a modeling hurdle rate that you need to figure out when you're adding diversifiers. The second is behavioral. And this is where most people understand stocks and bonds better than they understand alternatives or alternative strategies. Alternatives and alternative strategies tend to be less tax efficient, more opaque. And so, just like stocks can have their lost decades, alternatives often have their lost decades. And people are very unwilling to stick with those diversifying alternatives during lost

• 27:28Speaker 04

  decades, which means that when the diversification benefits eventually come around, they're performance chasing. And so you see these huge, what are called behavior gaps, in the returns of alternative investment strategy categories, because investors aren't sticking with them. So the return that they realize, what's called the investor return, tends to be hundreds of basis points behind the actual investment return. So the question is, how do we solve this? Well, it turns out institutions have solved this problem for 40 years using this concept of portable alpha, which is to say, well, instead of making room in the portfolio, can we use some financial engineering to take that alternative and just layer it on top of our portfolio?

• 28:11Barry Ritholtz?

  In other words, you're using the underlying 60-40 as a basis for borrowing in order to add a different asset class on top?

• 28:20Speaker 04

  Yeah, I think that actually the easiest way for most people to understand this without getting into the world of derivatives like futures and swaps is to think about buying a house. Let's say you have 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. You're gonna get the return of the house minus whatever the cost of financing is and then you're gonna 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,

• 29:02Speaker 04

  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 gonna 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. Same, we 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 and 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.

• 29:47Barry Ritholtz?

  So in other words, you're not owning the S and P 500, you're owning a derivative that gives you the right to purchase the S and 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.

• 30:09Speaker 04

  Exactly. So you could say, instead of buying a million dollars of the S and P 500, I'm going to take $50,000, use it as cash collateral to buy S and P 500 futures, a million dollars of S and P 500 futures, which will give me the total return.

• 30:23Barry Ritholtz?

  So that'll be equivalent, you'll get the same minus whatever the cost of the derivative.

• 30:27Speaker 04

  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. This 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.

• 30:51Barry Ritholtz?

  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?

• 31:03Speaker 04

  And people do that, right?

• 31:05Barry Ritholtz?

  Right. Which is great until it's not.

• 31:07Speaker 04

  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. But 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.

• 31:36Barry Ritholtz?

  So 08, 09, that sort of portable alpha probably didn't do great.

• 31:41Speaker 04

  Yeah, so let's talk about 08, 09. And let's talk about why we don't call this portable alpha and why we've rebranded it as return stacking.

• 31:47Barry Ritholtz?

  Right.

• 31:48Speaker 04

  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. It is really hard to beat the S and P 500.

• 32:02Barry Ritholtz?

  Right.

• 32:03Speaker 04

  If I have a bond benchmark and 40% of that is treasuries, how am I supposed to, 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 and 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. Right? Maybe the hedge fund does relative value volatility trading. Something with some sizzle, right?

• 32:30Barry Ritholtz?

  Right.

• 32:31Speaker 04

  And what's interesting is when you think about it, what the math does is I say, okay, I'm getting the S and P 500 beta and I'm stacking the return of this hedge fund on top. And 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 and P 500 instead of fishing in the same pond as everyone else. But what happens during a crisis?

• 32:50Barry Ritholtz?

  Well, everybody has to raise capital because the, there's, anyone with leverage is starting to get margin calls.

• 32:55Speaker 04

  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 and P 500 and the S and P 500 lost 50% from 2007 to the bottom in 2009.

• 33:09Barry Ritholtz?

  56 and change.

• 33:10Speaker 04

  56 and change. And you only posted 5%, 10% as collateral.

• 33:16Barry Ritholtz?

  See ya.

• 33:16Speaker 04

  You're getting a margin call. So you did better if you stacked it on bonds.

• 33:20Barry Ritholtz?

  Uh huh.

• 33:21Speaker 04

  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, that's what you have to do. So what they, they went to, all the institutions went to the hedge funds. And the hedge fund said, well, 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.

• 33:52Barry Ritholtz?

  And nobody markets this as not portable alpha.

• 33:55Speaker 04

  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?

• 34:14Barry Ritholtz?

  Right.

• 34:14Speaker 04

  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.

• 34:27Barry Ritholtz?

  That, that large, that many?

• 34:28Speaker 04

  It was a significant amount, and at least 50% of it, when surveyed, were looking to implement Portable Alpha.

• 34:33Barry Ritholtz?

  Uh huh.

• 34:34Speaker 04

  Post 2008, I mean, I think it was called a synthetic risk grenade. It just, the reputation was destroyed.

• 34:41Barry Ritholtz?

  Synthetic risk grenade, that's a great band, a college punk band, right?

• 34:48Speaker 04

  Absolutely, absolutely. And, and so, like many things, you lived through 2008, the language was, right? No derivatives, no shorting, no leverage. I mean, that was on product brochures at that point.

• 35:01Barry Ritholtz?

  Huh.

• 35:01Speaker 04

  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.

• 35:12Speaker 04

  And they've figured out ways that are much better operationally, or they've figured out other ways to get the leverage. So for example, private equity, we've seen a huge increase in private equity.

• 35:22Barry Ritholtz?

  Trillions, literally trillions.

• 35:23Speaker 04

  Private equity returns are basically just levered public equity returns.

• 35:27Barry Ritholtz?

  Uh huh.

• 35:28Speaker 04

  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.

• 35:47Barry Ritholtz?

  Right.

• 35:47Speaker 04

  And PS, I'm volatility laundering, to steal a quote from Cliff Asness, on the private side. And 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.

• 36:20Barry Ritholtz?

  No kidding, that's really, 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? It'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?

• 36:59Speaker 04

  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. These 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.

• 37:42Speaker 04

  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, you know, 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 and flight to safety assets, or the ability to short and profit from things that are crashing.

• 38:21Barry Ritholtz?

  Huh, really intriguing. This kind of ties in with a quote of yours that I want to ask later, but I might as well bring it back to this. Risk cannot be destroyed, only transformed. Explain.

• 38:37Speaker 04

  I don't think I'm the only person who has said this. 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. 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.

• 39:07Speaker 04

  Package it, price it, and transfer it to someone who's willing to hold it. That is what we do when we raise a round 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 and P 500 by picking stocks better, which has historically proven to be largely a fool's errand.

• 39:50Barry Ritholtz?

  Right.

• 39:51Speaker 04

  I can try to beat the S and P by saying, well, let me just get the S and 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.

• 40:20Barry Ritholtz?

  And it's worked out for places like Delta's pension fund.

• 40:24Speaker 04

  Delta, there are a large number of public pensions as well that have used this. Iper's, Ohio Police and Fire, Moser's. I mean, this is, I want to say like one of the, and what's interesting is, they don't want to talk about it.

• 40:38Barry Ritholtz?

  Oh, really?

• 40:39Speaker 04

  Now, the public pensions, it's in all their public filings. You can go find this.

• 40:43Barry Ritholtz?

  Right.

• 40:44Speaker 04

  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.

• 41:02Barry Ritholtz?

  So we'll talk about...

• 41:06Barry Ritholtz?

  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 Nodig has described, a new lens on reality that I think people should be thinking about. I love that description. Tell us what your liquidity cascade work found.

• 41:31Speaker 04

  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 just seemed to be, oh, there's someone got liquidated and had to sell, immediately sell down a large levered position, and 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

• 42:16Speaker 04

  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.

• 42:37Barry Ritholtz?

  Rationalizations.

• 42:38Speaker 04

  Rationalizations, 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. The 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, and then obviously the concept of a Fed put being tied in there, then there was the rise of passive investing.

• 43:04Barry Ritholtz?

  Right.

• 43:05Speaker 04

  Not just active versus passive in the type of price discovery that was happening, but truly how we trade indexed products at a market microstructure level, was that changing? Stocks aren't 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. Is 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?

• 43:49Speaker 04

  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? And what liquidity cascades ultimately argued was, anyone who thinks it was just their one thesis was probably wrong.

• 44:15Barry Ritholtz?

  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, jacques, it's that one thing? The world is much more complex than that. It's, 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 gonna buy one." Consumers drove inflation as much as fiscal stimulus and all these other things.

• 44:55Barry Ritholtz?

  So, how, how broad a conclusion did you reach that it's never just one thing?

• 45:01Speaker 04

  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.

• 45:13Barry Ritholtz?

  That's the narrative fallacy. They want a clean little storyline in a bow, and that's not how the universe works.

• 45:20Speaker 04

  All of these things interact. And so what I came out of the research piece with was not my view. I actually, the intro of the research piece, I said, "I'm not gonna tell you what my view is. I'm gonna walk through this objectively as I can, and I'm gonna 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 [BLEEP] I am."

• 45:40Speaker 04

  You know.

• 45:40Barry Ritholtz?

  So what did you find out with those three factors?

• 45:42Speaker 04

  So those three factors.

• 45:43Barry Ritholtz?

  So the Fed passive and derivatives.

• 45:46Speaker 04

  So, 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, a move into things like passive, a thing, 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, or lack of liquidity. One of the things I thought was really interesting in, in March 2020 is people always talk about market makers pull the plug.

• 46:31Barry Ritholtz?

  Right.

• 46:31Speaker 04

  Right? Markets go crazy. They're not running a charity. They're going to pull the plug when things aren't going well.

• 46:37Barry Ritholtz?

  Or at least lower their, their bid ask spread, widen them out, so.

• 46:40Speaker 04

  Yeah, they're going to widen them out and they're going to thin, thin the order book volume. What I thought was interesting that people don't often talk about is they're actually capacity constrained.

• 46:49Barry Ritholtz?

  Mm hmm.

• 46:49Speaker 04

  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.

• 47:01Barry Ritholtz?

  Wow.

• 47:01Speaker 04

  Because they had run out of balance sheet.

• 47:03Barry Ritholtz?

  Wow.

• 47:04Speaker 04

  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?

• 47:11Barry Ritholtz?

  Yeah, that makes sense, right?

• 47:13Speaker 04

  I've never heard anyone talk about it.

• 47:14Barry Ritholtz?

  Right.

• 47:15Speaker 04

  Right? But if you need them there and there's only three or four key market makers left, right? We need to make sure that they have healthy balance sheets. They're, they're systematically important institutions.

• 47:24Barry Ritholtz?

  They, they need a line somewhere, but the Fed's mandate isn't the smooth operation of the NIC. The Fed's mandate is low inflation and full employment.

• 47:35Speaker 04

  So, so it's little, little struck things like that. And, 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, right, 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, levered strategies, risk parity and trend following and alternatives. And again, I don't look at the boogeyman and say the market sells off and it's risk parity's fault. But I look at it 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.

• 48:17Speaker 04

  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. Escher painting of-

• 48:34Barry Ritholtz?

  Right. Famous, the waterfall-

• 48:36Speaker 04

  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.

• 48:57Barry Ritholtz?

  So I have so many interesting questions for you. I'm kind of fascinated by your, 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.

• 49:39Barry Ritholtz?

  You 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 gonna 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.

• 50:04Speaker 04

  You are right that there's absolutely panic and lizard brain and I don't mean that in any sort of derogatory way.

• 50:11Barry Ritholtz?

  No, it's-

• 50:11Speaker 04

  It's their survival instincts and I actually don't-

• 50:13Barry Ritholtz?

  It is what it is.

• 50:14Speaker 04

  I don't think they're irrational. I think ergodicity economics would argue you have to protect your capital to survive.

• 50:21Speaker 04

  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.

• 50:47Barry Ritholtz?

  Minus the tax advantage of the ETF.

• 50:49Speaker 04

  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 seven percent discount to the mutual fund. That's a little weird because it's the exact same pool of capital.

• 51:05Barry Ritholtz?

  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 sell or just reach out to whoever your custodian is.

• 51:16Speaker 04

  Yep.

• 51:17Barry Ritholtz?

  Whereas ETFs are quoted.

• 51:19Speaker 04

  Intra-day, but even at the end of day, that discrepancy existed. It wasn't just intra-day. That was, that was the NAV of the mutual fund versus the price of the ETF.

• 51:28Barry Ritholtz?

  Which had a higher trading volume. I'm going to guess the ETF.

• 51:32Speaker 04

  The ETF certainly had a higher trading volume, but the, the underlying problem is that the bonds weren't pricing.

• 51:40Barry Ritholtz?

  Oh, okay. Gotcha.

• 51:42Speaker 04

  The 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 quote should be much lower and we're going to price much lower.

• 51:57Barry Ritholtz?

  That's right.

• 51:57Speaker 04

  There's an interesting free option here if you are a Vanguard client.

• 52:02Barry Ritholtz?

  Buy the ETF, sell the mutual fund.

• 52:04Speaker 04

  Well, so 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.

• 52:14Barry Ritholtz?

  Right.

• 52:15Speaker 04

  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.

• 52:24Barry Ritholtz?

  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.

• 52:38Speaker 04

  Let me rephrase that. Things like that don't happen, except within a crisis.

• 52:42Barry Ritholtz?

  Okay.

• 52:43Speaker 04

  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. And here, you could argue, you can't short the mutual fund and buy the ETF. It's hard to arbitrate that spread. But again, anyone trading any bond mutual fund could have jumped a 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.

• 53:20Barry Ritholtz?

  Right.

• 53:21Speaker 04

  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.

• 53:35Barry Ritholtz?

  So...

• 53:35Speaker 04

  I'm not saying it's broken.

• 53:37Barry Ritholtz?

  So, 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 '09. 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.

• 54:22Barry Ritholtz?

  Maybe 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...

• 54:52Barry Ritholtz?

  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? Um, 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. And that's the exception. Every other time you're cut in half in the United States, you have to buy with both hands.

• 55:18Speaker 04

  Well, and what's interesting to me there is you and Jim are discussing, I love your analogy with, with the blind man and the elephant. Jim is discussing a supply and demand concept, and you're discussing a fundamental view, right?

• 55:31Barry Ritholtz?

  I see the world through a behavioral lens. He's seeing the world with, there's, the Fed is going to cause a giant increase in demand for equities regardless of what the supply is.

• 55:41Speaker 04

  Right.

• 55:42Barry Ritholtz?

  That's what happens to prices.

• 55:43Speaker 04

  And that'll drive prices up, and it causes 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 non-existent in the early 2000s, that'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.

• 56:22Barry Ritholtz?

  Right. At the same time, you have huge buybacks, right? The, 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. But overall, the size of the share float that's out there has shrunk. Another big, I don't know where, what the end game of that is. Can you do that perpetually?

• 56:49Speaker 04

  So I don't know what the

• 56:50Barry Ritholtz?

  Depublicize public markets?

• 56:54Speaker 04

  I don't know what the end game of, 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. We are truly privileged in the US to have what we have.

• 57:26Speaker 04

  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?

• 57:35Barry Ritholtz?

  It was pretty clear that people should have been asking that question in the mid 2000s. And just had no idea the sort of miscellaneous incentives and really complex structures that along with some the really, we got used to zero. But when Greenspan post nine 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. And zero, no one knew how to deal with that. And then, once we started seeing negative, you know, bonds, like, well, you lend us money and you pay us to hold it. Like, wait, what?

• 58:19Barry Ritholtz?

  And I think that caused all sorts of problems around the world. And people just didn't know how to contextualize.

• 58:27Speaker 04

  And to your point on behavior, I think, and 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.

• 58:43Barry Ritholtz?

  Right.

• 58:44Speaker 04

  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, it's very complex of how these things work.

• 58:59Barry Ritholtz?

  A little reflexivity in that, although you could make the argument that in March 2020, down 34%, and it felt like six weeks, people looked back to 09 and said, oh, I gotta be a buyer, because the last time we saw a big crash, the Fed rescued the markets, or the Fed did this and ultimately it led to that, maybe rescue is too oversimple. But isn't this why everything eventually gets arbitrage away? Don't the playback from the last cycle, the playbook not work in the next cycle? Because, hey, we've kind of figured this out?

• 59:37Speaker 04

  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 there 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.

• 59:56Speaker 01

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• 1:00:33Barry Ritholtz?

  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 why, if you're managing assets, did you go into the ETF side of it?

• 1:00:52Speaker 04

  The shift from pure research to managing assets, I think, is one that a lot of people ultimately make. When 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. I 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.

• 1:01:36Speaker 04

  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.

• 1:01:53Barry Ritholtz?

  Right.

• 1:01:53Speaker 04

  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.

• 1:02:03Barry Ritholtz?

  What motivated you to go mutual funds over ETFs?

• 1:02:06Speaker 04

  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. My concern of setting up my own ETF was that I was going to have to handle all the intraday trading of the creation of redemption baskets. It was going to require me to hire a whole op staff that I candidly didn't have the experience or know-how to manage. And I said, versus the mutual fund...

• 1:02:40Barry Ritholtz?

  Which is a little simpler, a little cleaner.

• 1:02:42Speaker 04

  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.

• 1:02:55Barry Ritholtz?

  How long did it take you to realize, hey, ETFs are 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.

• 1:03:07Speaker 04

  So 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 and there are some strategies for which the ETF I think is definitively the wrong structure.

• 1:03:53Speaker 04

  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.

• 1:04:12Barry Ritholtz?

  So as opposed to just converting them, you, you went that way, the exit and the relaunch.

• 1:04:17Speaker 04

  Yeah, because.

• 1:04:18Barry Ritholtz?

  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.

• 1:04:28Speaker 04

  Absolutely, absolutely. Yeah, I ultimately said, I think there are decisions I made wrong from a, 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, but there's also a utility.

• 1:05:09Speaker 04

  That they, 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 lack of a letter word, and they like the consistency. And there's utility in that even though it's from a return perspective, suboptimal.

• 1:05:52Speaker 04

  And that's hard for people like me sometimes to to look at and say, no, I need to teach you to do a better way. Let me 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.

• 1:06:14Barry Ritholtz?

  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. Give us the simple explanation of of what this is.

• 1:06:33Speaker 04

  And so all credit goes to my colleague Rodrigo Gordillo for coming up with the phrase return stacking. Because I think it's 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 and P. You can probably guess that one plus one equals two.

• 1:06:57Barry Ritholtz?

  Right.

• 1:06:57Speaker 04

  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 of trying to solve this addition through subtraction issue with diversification. How 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. It's basically the S and 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 and the return potential?

• 1:07:42Speaker 04

  And so return stacking at its core is trying to take the institutional concept of portable alpha. And bring it downstream because 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.

• 1:08:01Barry Ritholtz?

  So, so you, the white paper comes out, Wisdom Tree launches a product related to this. Did you have anything to do with that?

• 1:08:08Speaker 04

  So, back in 2017, you and I, I don't know if you remember this, you and I were on a Barron's Roundtable.

• 1:08:14Barry Ritholtz?

  Uh huh.

• 1:08:15Speaker 04

  Called What's Next For ETFs? And at that roundtable, I said.

• 1:08:19Barry Ritholtz?

  Uh oh.

• 1:08:20Speaker 04

  I said, I think what's next for ETF are capital efficient ETFs. And the example I gave was buy the, you know, instead of having a stock and bond fund, this fund could buy the S and P in overlay with treasury futures. And so if you give it a dollar, it's going to give you, say, 90 cents of the S and P and 60 cents of treasury futures, giving you a 90 60, a 1.5 times levered 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.

• 1:09:03Speaker 04

  Jeremy Schwartz, who's a good friend of both of ours, showed that article around internally. It was, we had a whole bunch of Twitter conversations about it. Next thing you know, he says, hey Cory, I'm launching a product on this and the Wisdom Tree NTSX fund was born.

• 1:09:16Barry Ritholtz?

  I recall, I recall Jeremy subsequently launching that. I, I, I hope they at least tossed you a bone and consulting something, nothing.

• 1:09:25Speaker 04

  Jeremy had me on a couple of podcasts to talk about it.

• 1:09:27Barry Ritholtz?

  All right, there you go. Um, I hope I didn't say anything too stupid at that roundtable. I can't remember that up on Sixth Avenue.

• 1:09:33Speaker 04

  Yeah.

• 1:09:34Barry Ritholtz?

  Right? By their offices?

• 1:09:36Speaker 04

  That's right. It was, and I, I actually have been using my headshot from that article since then, which at this point.

• 1:09:42Barry Ritholtz?

  I got a couple of great photos from that.

• 1:09:43Speaker 04

  So I didn't realize, this is like Pulitzer Prize winning photographer who took our photos. They're the best headshots I've ever had.

• 1:09:50Barry Ritholtz?

  Same, same.

• 1:09:51Speaker 04

  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.

• 1:09:58Barry Ritholtz?

  Every now and then I will see something show up on on a bio at some event for me. And I'm like, dude, that's 20 years old. I'm not only grayer and and 20 pounds lighter than then. But like, I look nothing like that anymore. It's like, well, we found that online. So, uh, yeah, I know exactly what you're what you're talking about.

• 1:10:18Speaker 04

  So I had to I had to get rid of that one. So, yeah, so that was the the birth of the NTSX fund. And I was super happy to see Wisdom Tree do that because I really do believe that this is a whole category of products that has not existed really before. There'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.

• 1:10:55Barry Ritholtz?

  Right.

• 1:10:55Speaker 04

  I can let you keep your stocks and bonds and I'm going to add a 10% allocation on top.

• 1:11:01Speaker 04

  When managed futures go through a lost decade like they did in the 2010s, the investor will barely notice it.

• 1:11:06Barry Ritholtz?

  Right.

• 1:11:06Speaker 04

  And they'll be able to stay in it for when managed futures does well in a year like 2012.

• 1:11:10Barry Ritholtz?

  So there's a that's the behavioral component of this. How does this differ just from straight up leverage? It it sounds like return stacking has a big leverage component.

• 1:11:20Speaker 04

  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 6040 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. And in fact, I would point to the Bridgewater All Weather Fund, right?

• 1:11:50Barry Ritholtz?

  Who takes 25% gold and...

• 1:11:52Speaker 04

  Takes this concept to the extreme and runs with 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...

• 1:12:07Speaker 04

  So much leverage and it's because they're using leverage to unlock the benefits of diversification rather than using leverage to amplify returns.

• 1:12:14Barry Ritholtz?

  Gotcha. That makes a lot of sense. So you currently are running five different return stacked ETFs. Do they each have a different goal? How do different combinations work? And what are we 700, 800 million dollars?

• 1:12:27Speaker 04

  Just clipped over 800 million dollars, 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. So I'll just give two really quick examples.

• 1:13:07Speaker 04

  We have one fund that for every dollar you invest with us will give you what is effectively a dollar of passive large cap US 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 US fixed income. Plus a dollar of managed futures trend following. Same managed futures trend following on top, but one gives you the S and P, one gives you bonds as the, as the bottom layer.

• 1:13:35Barry Ritholtz?

  So, 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.

• 1:13:46Speaker 04

  I 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 and P 500. So take that passive S and P 500 and buy our fund. You get the S and P back with the managed futures on top because you don't want to do it with bonds. Cause you think your bond manager is going to add value. So 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.

• 1:14:29Speaker 04

  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.

• 1:14:37Barry Ritholtz?

  So, 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 their, their, either their core portfolio? Or any of their satellite holdings?

• 1:14:52Speaker 04

  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. We don't need to buy an ETF.

• 1:15:04Barry Ritholtz?

  Really?

• 1:15:05Speaker 04

  They're, 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, 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?

• 1:15:36Barry Ritholtz?

  Right.

• 1:15:37Speaker 04

  And you're saying, well, because diversification and.

• 1:15:40Barry Ritholtz?

  The next cycle.

• 1:15:42Speaker 04

  Brian Portnoy says diversification means always having to say you're sorry.

• 1:15:45Barry Ritholtz?

  That's right.

• 1:15:46Speaker 04

  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, 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 and P 500 and add managed futures on top. But for the diversifiers, they're going, this is a great way to introduce my alternatives. Without giving up all the beta.

• 1:16:21Barry Ritholtz?

  Right.

• 1:16:21Speaker 04

  And having that return hurdle issue and having that behavioral friction issue.

• 1:16:24Barry Ritholtz?

  All right. So, so you have US equity with managed futures. You have US bonds with managed futures. What are the other ETFs?

• 1:16:33Speaker 04

  We have a US equity plus what we would call a multi-asset carry strategy.

• 1:16:37Barry Ritholtz?

  Which is?

• 1:16:38Speaker 04

  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? And 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.

• 1:17:22Speaker 04

  And the idea there is not to say, let's stack bonds on top of equities in your portfolio. The 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 in 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.

• 1:18:08Speaker 04

  You 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 diversified 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. You love Cliff Asness at AQR, you love their fund. Well, you can buy my global stocks and

• 1:18:49Speaker 04

  bonds fund to free up the cash to then invest in his managed futures fund. And what you have effectively done is kept your 6040 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.

• 1:19:08Barry Ritholtz?

  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. During 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 nodding, said, oh, you got to watch this. This is hilarious. In a good way, not a sarcastic way. What was going on with crypto

• 1:19:51Barry Ritholtz?

  and NFT trading during the COVID lockdowns?

• 1:19:55Speaker 04

  So Jason Buck is a good friend of mine. He runs Mutiny Funds and we started this podcast as you do.

• 1:20:00Barry Ritholtz?

  Mutiny Funds.

• 1:20:01Speaker 04

  Mutiny Funds.

• 1:20:03Barry Ritholtz?

  Wasn't there another pod, maybe it was he who was hosting it was Pirate Capital?

• 1:20:09Speaker 04

  Pirates of Finance.

• 1:20:10Barry Ritholtz?

  Pirates of Finance.

• 1:20:11Speaker 04

  So that was Jason and I started that during the pandemic.

• 1:20:14Barry Ritholtz?

  Okay.

• 1:20:14Speaker 04

  We weren't allowed out of our houses anymore.

• 1:20:16Barry Ritholtz?

  I love that. I love the title of that podcast.

• 1:20:19Speaker 04

  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.

• 1:20:25Barry Ritholtz?

  Right.

• 1:20:25Speaker 04

  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.

• 1:20:36Barry Ritholtz?

  Right.

• 1:20:36Speaker 04

  You had all these retail traders who started trading crypto and the available functionality of what you could build in crypto really exploded. So you not only had NFTs, but you had all these, what are 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.

• 1:21:08Barry Ritholtz?

  Right.

• 1:21:08Speaker 04

  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 I certainly wouldn't say I maximized it.

• 1:21:20Barry Ritholtz?

  Yeah, but you're a computer science market structure guy. This is your sweet spot.

• 1:21:25Speaker 04

  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 want to say, oh, lower information flow, right? More momentum driven.

• 1:21:42Barry Ritholtz?

  Low information voters.

• 1:21:44Speaker 04

  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. And all I had to do was port the exact same skillset that was a bloodbath in traditional markets.

• 1:22:10Barry Ritholtz?

  Right.

• 1:22:10Speaker 04

  Eking for every bit. And it's just, you're just printing money. And it was a very limited window. That does not exist anymore.

• 1:22:17Barry Ritholtz?

  Right.

• 1:22:17Speaker 04

  But there was this really fascinating window of both investor behavior and opportunity in what was developing and what it all could become.

• 1:22:26Barry Ritholtz?

  So, so I'm assuming you made a couple of shekels trading?

• 1:22:31Speaker 04

  We had, there were some fun trades.

• 1:22:32Barry Ritholtz?

  Right.

• 1:22:33Speaker 04

  There were some fun trades.

• 1:22:34Barry Ritholtz?

  How, how quickly did you realize that window was closing? And I'm assuming that was pre FTX and SBF and Sam Bankman-Fried and that mayhem.

• 1:22:45Speaker 04

  It was probably during the Luna collapse. And again, I apologize for folks who didn't track the-

• 1:22:52Barry Ritholtz?

  So Luna is a stablecoin that was supposed to just trade at a dollar. What's his name, very famously, got a tattoo-

• 1:23:00Speaker 04

  Yes.

• 1:23:00Barry Ritholtz?

  -of it, Novogratz.

• 1:23:02Speaker 04

  Novogratz.

• 1:23:02Barry Ritholtz?

  And then, suddenly, the rug was pulled out and it turned out to not be all it was-

• 1:23:10Speaker 04

  Yeah. You had these-

• 1:23:12Barry Ritholtz?

  -reported to be.

• 1:23:12Speaker 04

  These stablecoins, 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 stablecoins. And I don't think there's any success stories there. They all-

• 1:23:32Barry Ritholtz?

  No.

• 1:23:32Speaker 04

  -blew up.

• 1:23:33Barry Ritholtz?

  Right.

• 1:23:34Speaker 04

  Mark Cuban-

• 1:23:35Barry Ritholtz?

  It's almost-

• 1:23:35Speaker 04

  Mark Cuban famously lost a bunch of money in one of those.

• 1:23:38Barry Ritholtz?

  Oh, did he?

• 1:23:39Speaker 04

  Yeah, what was called, I believe it was called, "Iron Finances" was what the, it was called. And that, you know, 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-

• 1:23:52Barry Ritholtz?

  Doesn't that sound like portfolio insurance from the 87 crashes? Nothing new, old again. It's just, it's just amazing that, oh yeah, we'll find a way to just hedge it as the market starts rolling off.

• 1:24:05Speaker 04

  So you had all this abundance of hot capital in this market that suddenly evaporated. You 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.

• 1:24:28Barry Ritholtz?

  Right.

• 1:24:29Speaker 04

  And the music had stopped playing. And I was like, I'm just going to get out of the room.

• 1:24:32Barry Ritholtz?

  Right.

• 1:24:33Speaker 04

  Because, you know, you can over-trade these things.

• 1:24:35Barry Ritholtz?

  No, to say the very least.

• 1:24:37Speaker 04

  And also, it's not my job. I actually do have a day job.

• 1:24:39Barry Ritholtz?

  Right. So, so that was kind of interesting. You're also located in Florida, in South Florida. What's it been like?

• 1:24:50Barry Ritholtz?

  Being a new dad in the midst of the west coast of Florida that really got shellacked by three consecutive har- everybody's talking about Helene, but what was it Debbie over the summer really did some big damage and then the middle one. So it was like a triple hit.

• 1:25:10Speaker 04

  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 originally from Boston and was moving from Boston, driving down 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.

• 1:25:26Barry Ritholtz?

  No warning, just...

• 1:25:27Speaker 04

  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.

• 1:25:36Barry Ritholtz?

  Right.

• 1:25:36Speaker 04

  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. But most importantly, my family is, 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. I, it's just, 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.

• 1:26:06Barry Ritholtz?

  What, what's the rest of the neighborhood look like?

• 1:26:10Speaker 04

  It honestly is pretty devastating. So down near the water, every single restaurant is just gone.

• 1:26:18Barry Ritholtz?

  Just gone?

• 1:26:18Speaker 04

  Just gone.

• 1:26:19Barry Ritholtz?

  Like wiped off from the face of the earth?

• 1:26:21Speaker 04

  Wiped off. We had, we had an eight or nine foot storm surge.

• 1:26:25Barry Ritholtz?

  Yeah.

• 1:26:25Speaker 04

  So...

• 1:26:26Barry Ritholtz?

  Not quite sandy, but pretty close.

• 1:26:27Speaker 04

  Pretty close. So you can imagine all these beachfront tiki bars.

• 1:26:31Barry Ritholtz?

  Yeah.

• 1:26:31Speaker 04

  You know, under nine feet of water and then the tide goes out. It's just...

• 1:26:34Barry Ritholtz?

  There's nothing left in...

• 1:26:35Speaker 04

  It's gone. Um, 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.

• 1:26:47Barry Ritholtz?

  Yeah.

• 1:26:47Speaker 04

  You know, everything ends up on the curb.

• 1:26:50Barry Ritholtz?

  Right.

• 1:26:50Speaker 04

  And so driving down our neighborhood for the last, I guess, two months now, it's just people's lives.

• 1:26:58Barry Ritholtz?

  Yeah.

• 1:26:58Speaker 04

  Are on the curb. And what people don't tell you until you live this is... That seawater is also mixed with sewage water.

• 1:27:06Barry Ritholtz?

  Yes.

• 1:27:06Speaker 04

  And so the whole place reeks.

• 1:27:09Barry Ritholtz?

  Right.

• 1:27:10Speaker 04

  And all the plants die. Cause 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.

• 1:27:21Barry Ritholtz?

  Right. I mean, but aside from that.

• 1:27:23Speaker 04

  Wonderful place to live.

• 1:27:25Barry Ritholtz?

  Are you gonna, so you were renting, right?

• 1:27:28Speaker 04

  Yes.

• 1:27:28Barry Ritholtz?

  So are you gonna stay there? Are you gonna relocate? What's the thinking?

• 1:27:31Speaker 04

  Well, you're asking the wrong person. You should ask my wife. I don't, I don't have executive power here. Um, I think we will stay in the area. We really love where we live. Um, St. Pete is a, is a wonderful area for us. We love raising our son there for the moment. We'll see how it plays out.

• 1:27:49Barry Ritholtz?

  All right. That's really interesting. All right. My last two curveball questions for you. Uh, at Cornell, you played rugby? Tell us about that.

• 1:27:57Speaker 04

  Yeah. So I, I grew up as a lacrosse player, got to Cornell and I mean, the lacrosse program there is phenomenal. I was never gonna make the team. I was.

• 1:28:06Barry Ritholtz?

  That's a serious, serious program.

• 1:28:09Speaker 04

  Yeah. And I've always enjoyed, uh, being athletic. So I was looking around what to do and.

• 1:28:14Barry Ritholtz?

  Where else can I break bones besides lacrosse?

• 1:28:16Speaker 04

  Well, this is particularly dumb because in high school I actually played lacrosse and got a skull fracture.

• 1:28:22Barry Ritholtz?

  Nice.

• 1:28:22Speaker 04

  So all the doctors said, stop playing sports.

• 1:28:24Barry Ritholtz?

  Right.

• 1:28:25Speaker 04

  They wouldn't let me play soccer anymore because I couldn't head the ball.

• 1:28:27Barry Ritholtz?

  Really?

• 1:28:28Speaker 04

  Yeah.

• 1:28:28Barry Ritholtz?

  Oh, so that's a serious skull fracture.

• 1:28:30Speaker 04

  Oh, yeah.

• 1:28:30Barry Ritholtz?

  I broke my nose playing soccer.

• 1:28:32Speaker 04

  Yeah.

• 1:28:33Barry Ritholtz?

  Um, in a collision and, uh, just remember waking up flat on my back, but nobody ever said, you should stop.

• 1:28:39Speaker 04

  Oh, yeah. No, I had to get a spinal tap. I had.

• 1:28:42Barry Ritholtz?

  Oh, really? A serious damage?

• 1:28:43Speaker 04

  Brain fluid leaking out my ear.

• 1:28:45Barry Ritholtz?

  Right.

• 1:28:45Speaker 04

  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.

• 1:28:57Barry Ritholtz?

  How?

• 1:28:57Speaker 04

  This sounds bad, but you're like, you're at an Ivy League school. It's kind of like a, it feels like an Ivy League-ish sport. I was like, that would just be fun to go play rugby.

• 1:29:04Barry Ritholtz?

  Right.

• 1:29:04Speaker 04

  And it was a ton of fun, and it was incredibly stupid of me.

• 1:29:09Barry Ritholtz?

  Right. Broken fingers and ribs?

• 1:29:11Speaker 04

  No, I survived pretty well. So I was, what's, what's, you've only known me as I've been older. I used to probably weigh 40 pounds less.

• 1:29:19Barry Ritholtz?

  Oh, really?

• 1:29:19Speaker 04

  I was, yeah. In, in college, I was a very thin guy.

• 1:29:23Barry Ritholtz?

  Yes, all of us were.

• 1:29:24Speaker 04

  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 ruts.

• 1:29:31Barry Ritholtz?

  I gotcha. That, that's interesting. And, and, and our final curveball question. Favorite Dungeons and Dragons monster and why? And you could guess where that question came from.

• 1:29:43Speaker 04

  Yeah, I can guess where that one, well, this one actually-

• 1:29:45Barry Ritholtz?

  So, so wait, let me give a little color. You're in a financial D and D game that's been going on for years.

• 1:29:52Speaker 04

  So this is funny. Actually, if you'll allow me.

• 1:29:54Barry Ritholtz?

  Go ahead.

• 1:29:54Speaker 04

  Can I, can I bring this into the first, your last five questions?

• 1:29:58Barry Ritholtz?

  Sure.

• 1:29:58Speaker 04

  Because you're, I believe the first of your last five questions you ask every guest is what content are you consuming?

• 1:30:04Barry Ritholtz?

  Right. What are you, what are you watching? What are you listening to?

• 1:30:06Speaker 04

  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.

• 1:30:20Barry Ritholtz?

  Right.

• 1:30:20Speaker 04

  But there are seven of us in the industry who started five years ago and we play weekly. And it's three hours. And that sounds incredibly nerdy, but for those who have never played Dungeons and Dragons is really a collaborative storytelling.

• 1:30:34Barry Ritholtz?

  Right.

• 1:30:34Speaker 04

  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. So the, the dice play a role in the story. And so for- 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 of this story's playing out in front of me.

• 1:31:14Speaker 04

  But also, I get to collaborate and be a creative part of the story creation. So that's, that's been a really special part of my life for the last five years.

• 1:31:22Barry Ritholtz?

  So, so that'll be our first question because you're not really watching or, or streaming much. Let's talk about mentors who helped shape your career.

• 1:31:31Speaker 04

  So there, I, I will say, um, 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. There'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, um, reading and interacting with folks like Cliff Asness and Auntie Ilmanin, who have been,

• 1:32:16Speaker 04

  you know, huge idols of mine in what they've contributed to the industry and just been very open to communicating with me. Um, I would say from a, from an actual practitioner perspective have been, have been big mentors.

• 1:32:28Barry Ritholtz?

  Really, really interesting. Both of them at AQR, right?

• 1:32:30Speaker 04

  Yes.

• 1:32:32Barry Ritholtz?

  What about books? What are some of your favorites? What are you reading right now?

• 1:32:35Speaker 04

  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.

• 1:32:45Barry Ritholtz?

  How was that on audio as opposed to reading it?

• 1:32:48Speaker 04

  Andy Serkis, who played Gollum, 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.

• 1:32:59Barry Ritholtz?

  Really?

• 1:32:59Speaker 04

  You could-

• 1:33:00Barry Ritholtz?

  He's doing voices.

• 1:33:01Speaker 04

  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. It'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, I wish I had, I had more. So that's one I, I did just recently and I tend to do audiobooks because it's easier for me when I go out for a walk or a run.

• 1:33:30Barry Ritholtz?

  Mm-hmm.

• 1:33:31Speaker 04

  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.

• 1:33:38Barry Ritholtz?

  I know what that experience is like. Um, our final two questions. What sort of advice would you give to a recent college grad interested in a career in quantitative investing?

• 1:33:50Speaker 04

  So I'll go back to what I just said, which was, and I, it 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 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

• 1:34:34Speaker 04

  of your clients, to understanding the, the markets and the microstructure and who's operating in them, that trying to discover that all on your own, there's a great chance you don't survive it. And so to me, I wish, I, I take that back. I've had a phenomenal career. I'm very lucky. I wouldn't change a thing. But I, 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.

• 1:35:02Barry Ritholtz?

  Yeah, except you would still be at AQR if you worked at AQR. The, um, you know what, I'm, I'm kinda-

• 1:35:07Speaker 04

  First of all, they wouldn't have hired me.

• 1:35:08Barry Ritholtz?

  Well-

• 1:35:09Speaker 04

  They got a lot smarter people than me.

• 1:35:11Barry Ritholtz?

  I, I'm kinda 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, and chatting, that seems to have kinda faded away, but 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 right working on this? I did some research on this, you might want to take a look at it." "Oh, thanks, that's really..."

• 1:35:52Barry Ritholtz?

  Like, there was a, a very, um, level playing field of, of, not even mentorship, just encouragement from people. I, I kinda 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, as so many other people we know in common.

• 1:36:13Speaker 04

  Um, I'm still very active on Twitter, but it's a very curated thing for me. I, what I find is I, like, I'm in, I'm in groups, for example, uh, of forty, fifty, like, quants who can't disclose who they are-

• 1:36:28Barry Ritholtz?

  Right.

• 1:36:29Speaker 04

  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, I'm still not sure I could find anywhere else.

• 1:36:41Barry Ritholtz?

  Right.

• 1:36:41Speaker 04

  One 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, I think it was a small community aspect that has disappeared and it's hard to rebuild that unless you build your own walled garden.

• 1:37:22Barry Ritholtz?

  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.

• 1:37:56Speaker 04

  But you lose a bit of the serendipity of discovery.

• 1:37:58Barry Ritholtz?

  Yes, exactly.

• 1:37:59Speaker 04

  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.

• 1:38:06Barry Ritholtz?

  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. You missed, like, it's like when at the last inning of a baseball game when everybody

• 1:38:49Barry Ritholtz?

  files out and you're in the bathroom and you come back and where did everybody go?

• 1:38:54Speaker 04

  Well, I'll tell you, during that period, I had some fantastic conversations with you over DMs, so I, you know, I missed whoever that was.

• 1:39:02Barry Ritholtz?

  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, [BLEEP]ation 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, and then it's just gone away. And, you know, there are a lot of reasons to not be happy with Elon Musk.

• 1:39:46Barry Ritholtz?

  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, you know, 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?

• 1:40:24Speaker 04

  There'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...

• 1:41:06Speaker 04

  Of course, I'm going to be the one to crack the market and figure out how to time it. It'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 and 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 saying... 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?

• 1:41:50Speaker 04

  And 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?

• 1:42:06Barry Ritholtz?

  Huh, really, really interesting. Corey, thank you for being so generous with your time. We have been speaking with Corey Hoffstein. 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. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find your favorite podcasts. 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.

• 1:42:51Barry Ritholtz?

  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 Baumann is the head of podcasts here at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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