Stay Curious, Produce Success
By Dave Hoffman, Editor
Last week’s markets were shaken by the largest decline in Japan’s Nikkei index, followed by 10% increase the next day. So what does this market turbulence portend for investors?
In a recent special episode of the Get Stacked podcast, Resolve Asset Management CEO Mike Philbrick pointed to the unwinding of a highly leveraged yen carry trade as a key contributor.
“You had an increased cost of holding all of those leveraged trades that occurred simultaneously. And they kind of feed on themselves until the levered trades come off to the point where unlevered investors are willing to step in and start to purchase the assets that are on sale,” he said.
Rodrigo Gordillo, President at Resolve Asset Management, added that the market turmoil was further exacerbated by broader economic factors, including weakness in the U.S. economy, a slowdown in China, and geopolitical tensions in the Middle East.
As the discussion turned to the performance of return stacking strategies, the panelists emphasized the importance of diversification and risk management. Gordillo noted that while long-term volatility and drawdowns for stacked portfolios may be slightly higher than standalone equity exposure during any normal calendar year, the long-term diversification benefits has in the past significantly reduced drawdowns during the most extreme periods of market stress.
“It’s the long-term picture that’s one of allowing us to stack those returns but not necessarily stacking or doubling the amount of risk,” Gordillo said.
Corey Hoffstein, Chief Investment Officer at Newfound Research, elaborated on the risk management mechanisms embedded in the panel’s trend following strategies, including position limits, volatility targeting, and Value-at-Risk (VaR) constraints. He noted that these risk controls helped mitigate losses as the equity market sell-off unfolded.
“If we just rewind the clock to mid-July, there were very strong global equity trends and the trend program wanted to get longer and longer. And we had that hard cap at 100%, which again helped mitigate some of the losses as the market rolled over,” Hoffstein said.
The discussion also touched on the role of futures yield or “carry” strategies, which Philbrick described as providing a steady “tailwind” to portfolios. Gordillo noted that the carry strategy had been positioned with a substantial short equity exposure, which helped provide some positive returns versus a trend following stack in this particular market correction.
When asked about the potential for return stacking strategies to provide “crisis alpha” – or outperformance during market downturns, the managers emphasized that their trend following strategy is not meant to be a first responder in a crisis, but rather provide diversification benefits over a longer time horizon of weeks to months.
“Trend following comes in the second part of a crisis …[as] second responders. It’s more prolonged week, prolonged months, sustainable trends that … by the fundamental nature of trend following, you will have the transition towards the things that are working and away from the things that are not and provide a level of balance that the vast majority of strategies don’t have” Gordillo said.
As the discussion drew to a close, the panelists emphasized the importance of setting appropriate expectations and risk tolerances when incorporating return stacking strategies into investment portfolios. Hoffstein suggested that allocations above 20-30% of a portfolio may result in significant tracking error, requiring investors to be highly disciplined and committed to the approach.
If you want to hear the webinar’s Live Q&A click the link here:
Return Stacked Portfolio Solutions:
Return Stacked Portfolio Solutions is a joint Venture between Newfound Research LLC and ReSolve Asset Management Global*. Return Stacking aims to help investors unlock the benefits of diversification by using their capital more efficiently and effectively. At its core, Return Stacking is the idea of layering one investment return on top of another, achieving more than $1.00 of exposure for each $1.00 invested. This allows investors to maintain their core stock and bond exposure while simultaneously introducing new, diversifying return streams.
Learn more at: www.ReturnStacked.com and www.ReturnStackedETFs.com
Firm Summaries:
Newfound Research
Newfound Research LLC is a quantitative investment and research firm dedicated to helping investors pro-actively unlock the benefits of diversification through Return Stacking. We manage alternative strategies and capital efficient solutions that allow investors to implement Return Stacking concepts.
ReSolve Asset Management SEZC
ReSolve is an alternative asset management firm which focuses on providing cutting-edge, globally diversified and systematic investment strategies that are non-correlated to traditional portfolios. We manage private and public funds as well as bespoke separately managed accounts for investors seeking the potential to stack and smooth out portfolio returns.
