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Stacking Managed Futures with RSST and RSBT
In this episode, Rodrigo Gordillo, President of ReSolve Asset Management and Co-Founder of Return Stacked ETFs, delves into the history, mechanics, and benefits of managed futures strategies. Gordillo recounts the evolution from the original turtle traders to modern systematic approaches in trend following. He explains the behavioral finance underpinnings that make these strategies effective, including concepts like anchoring and cascading effects. The conversation covers the diversification benefits of managed futures, their non-correlation with traditional asset classes, and their performance in different market regimes. Gordillo also introduces return stacking and portable alpha concepts, illustrating how these methods can provide both diversification and potential outperformance without significantly increasing portfolio risk. The discussion includes practical examples and the mechanics behind ETFs like RSST and RSBT.
00:00 Introduction to Managed Futures
01:24 Understanding Trend Following
03:11 Behavioral Finance and Trend Following
04:12 Benefits of Investing in Managed Futures
07:46 Challenges of Diversification
10:30 Return Stacking Explained
13:19 Mechanics of RSST and RSBT
21:06 Practical Use Cases for Return Stacking
23:45 Conclusion and Further Learning
Definition of terms used:
S&P 500: A market-capitalization-weighted index that tracks the performance of approximately 500 leading U.S. publicly traded companies, widely used as a benchmark for the overall U.S. equity market.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please click here (https://www.returnstackedetfs.com/rsst-return-stacked-us-stocks-managed-futures/) Read the prospectus or summary prospectus carefully before investing.
Investments involve risk. Principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Brokerage commissions may apply and would reduce returns. Toroso Investments, LLC (“Toroso”) serves as investment adviser to the Funds and the Funds’ Subsidiary. Newfound Research LLC (“Newfound”) serves as investment sub-adviser to the Funds. ReSolve Asset Management SEZC (Cayman) (“ReSolve”) serves as futures trading advisor to the Fund and the Funds’ Subsidiary. Foreside Fund Services, LLC is the distributor for the Funds. Foreside is not related to Toroso, Newfound, or ReSolve.
Transcript
Stacking Managed Futures with RSST and RSBT with Rodrigo Gordillo,
2
:president, resolve Asset Management
and Co-Founder Return Stacked ETFs.
3
:What are managed future strategies?
4
:Rodrigo Gordillo: It is a
strategy as old as modern finance.
5
:Uh, if you think about the original turtle
traders and the market wizards, I'm sure a
6
:lot of people in your audience have heard
of those, um, kind of individuals that.
7
:That were legends in the trading world.
8
:They were the original trend
following managed futures guys, right?
9
:They were, they were looking at
charts, seeing if there were going
10
:up and they were trading equities.
11
:They were trading global bonds,
commodities, currencies, and identifying
12
:upper trends and buying them.
13
:And then looking at the charts and,
you know, manually clicking those
14
:orders when they go and start losing
money, they start shorting 'em.
15
:And, uh, that's how trend following
began from a fundamental perspective.
16
:And then over the years, and that's,
that's back in the eighties, right?
17
:But over the years, it evolved
into more systematic approaches
18
:where you're, you know.
19
:And very, very disciplined about
how you are executing those trades.
20
:No longer gut based, but
more systematically based,
21
:repetitive and consistent.
22
:So that is what trend following
is, is there's something that has
23
:recently gone up and is likely to
continue to go up for a period.
24
:And something that has recently
gone down is likely to continue
25
:to go down for a period.
26
:And, uh, we see this.
27
:Play out in, in stocks, in individual
stocks, even in asset classes.
28
:And all these, uh, asset classes
that I just walked you through,
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:it tends to play out over time.
30
:Um, and so why is it that this.
31
:Phenomenon works.
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:Why isn't it been our about?
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:Um, and I think the answer to
that has been, uh, answered by
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:Amos Dki and Danny Kahneman.
35
:Um, sadly Kahneman recently passed
away, but he was at the forefront of
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:this with, uh, behavioral finance.
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:Talking about concepts like anchoring
and adjusting where information comes
38
:out and people anchor to, to the
information, but not fully adjust to
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:the new information, just a little bit.
40
:So there's time for us to identify
that people are anchoring upward.
41
:You can place your bets in and then you
can benefit from the adjustment that
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:inevitably goes down, or cascade effects,
which is the same idea of like cascading
43
:information, taking a while to dissipate.
44
:So those are the behavior angles.
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:There's also some risk reasons why
it continues to work, but broadly
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:speaking, I think that if, um, if
you're gonna see, the reason you see
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:this working is because human beings
are, continue to be human beings and
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:we tend to have hurting behavior.
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:And, um, and it, it's, it's
never really gone away.
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:Interviewer: What is the benefit
of investing in managed futures?
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:Rodrigo Gordillo: The first thing
is, if you ever do invest in managed
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:futures, you will allocate to them.
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:You'll likely have that position
or that that, um, fund or ETF be
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:the most diversified thing you
have in your portfolio, right?
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:Like most 60 40 portfolios
are exactly that 60%.
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:Bunch of equities, mostly domestic.
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:'cause we have domestic home country
bias, some international, and the
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:bonds are generally very domestic.
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:So it's very, very domestically driven.
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:Two asset classes and
not much more than that.
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:When you look and you x-ray into the
options for managed futures, trend
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:followers to select asset classes, we're
looking at dozens and dozens of markets
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:across those major categories, right?
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:Equities, bonds,
commodities, and currencies.
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:So first and first and
foremost, diversification.
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:Secondly, I.
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:The golden rule behind asset allocation
and portfolio construction is you wanna
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:find as many things that have an upward
sloping equity line so that you expect
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:to make positive returns over time, but
move differently from each other, right?
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:We've seen that firsthand between
bonds and equities from:
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:all the way to nine to 2020.
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:Some of those correlations have
broken down, and we've always
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:known that they would when there
was an inflationary regime, but.
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:We see the value of that diversification.
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:The question is, you know, where else
can we find true non-correlation?
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:And when you look at the hedge fund space,
when you look at all the categories from
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:long, short equity to market, neutral to
merger arbitrage, to you know, the private
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:credit, private equity, the two categories
that stand out as being legitimately.
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:Consistently zero correlation
over a prolonged period of time.
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:And the ability to have really strong
negative correlations at the right
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:time happens to be managed future
trend and and systematic macro.
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:And the reason for that is because they're
not market neutral, they are directional.
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:If the trends are up and we're
in a big equity bull market, then
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:there's gonna be more returns coming
from the equities that we are long
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:in that trend following strategy.
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:But if, God forbid there were to
be a bear market, um, guess what?
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:The benefit of being able to
short equities, short commodities,
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:go long treasuries in oh eight.
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:Was where all the magic happened, right?
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:It just happens to be a unique asset class
that has historically provided double
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:digit returns when you meet 'em the most.
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:Uh, and then when it's the, the other
interesting thing about trend following is
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:that it doesn't try to predict the future.
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:It's a reactive function.
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:Something's happening.
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:We are going to iterate based
on what's happening today.
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:And so it didn't need to predict.
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:Um, that in an inflationary regime like
:
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:the best game in town, and that you
wanted to short both equities and bonds.
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:It wasn't looking back at oh eight
and saying, Hey, bonds were good.
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:Commodities and equities were bad.
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:We should do that now.
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:It just reacted.
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:And that's another, another great year
for just a broad indices of managed
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:futures of double digits, mainly from,
uh, commodities and then shorting bonds.
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:Right.
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:So it's just, it's.
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:It's got this great character of crisis
alpha and um, and non-correlation equities
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:and bonds, which is great obviously during
bear markets and inflationary regimes.
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:Now we can talk about when
is not so great, but, um, but
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:yeah, broadly speaking, that's
why people should want them.
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:Interviewer: Why aren't managed
futures as popular diversifiers you'd
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:imagine with everyday investors?
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:Rodrigo Gordillo: When you talk
to the average investor or advisor
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:and you talk about the broad
idea of diversification, um.
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:Why widely speaking people believe that
diversification is a good thing, right?
117
:That's, that's generally
not, uh, questioned.
118
:But the reality is that the lived
experience of those that decided to
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:diversify, and even if like we're talking
about global equity investing, right?
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:Those that are being thoughtful and
using their fiduciary responsibility
121
:correctly have been burnt, or it's
been a bear market in diversification
122
:as Meb favor puts in, right?
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:And so.
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:Reality is over the last decade when you
could have just invested in a very cheap,
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:simple index like the s and p 500, um.
126
:You would've been better off.
127
:And diversification to that decade
of investors felt, you know, I think
128
:there's, there's synonymous with words
like sacrifice or, or compromise, right?
129
:A trade-off between risk management
and, and the return potential, right?
130
:We just don't think that, um, that
that's gonna be the case in the future.
131
:And.
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:I think they're, they were correct.
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:Right?
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:If you are adding a 10, 20% allocation
managed futures in the last decade, you
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:had two things that needed to go right.
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:Number one, you need to deliver
diversification, and number two, you
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:needed to beat the s and p 500, right?
138
:That's a really tough thing
to tall, tall order, right?
139
:And so.
140
:The, the last decade has been just a,
had a chilling effect to anything that
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:wa that wasn't the Mag seven really.
142
:Let's, let's be honest, if we get down
to the nitty gritty of it, and, and
143
:so it just, they just got out of favor
until:
144
:Again, it made positive
returns during that decade.
145
:There were just, there were just
low single digits in contrast
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:to 16% annualized during, you
know, right before the crash.
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:So.
148
:It's, that's just really hard to do.
149
:Institutions were fine because they never,
they don't necessarily use managed futures
150
:to, like, they don't sell their equities
and bonds to buy these diversifiers, at
151
:least the more sophisticated ones, right.
152
:They use this concept of portable
alpha return stacking to stack
153
:these diversifiers on top.
154
:And, and that's really the, the big shift
in the last couple years in retail that
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:allows people to say, okay, you know,
maybe, maybe it isn't, diversification
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:isn't necessary evil anymore.
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:Maybe it's accretive.
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:Maybe it's now we have a
way to say yes and right.
159
:Yes to my equities and
some diversification.
160
:Whereas in the past, I think it was just.
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:Too risky to have a prolonged period
where you would underperform equities.
162
:Interviewer: How does return
stacking or portable alpha solve the
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:traditional diversification dilemma?
164
:Rodrigo Gordillo: You have a decade,
like the last decade where you know,
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:you're, you're waiting for the other
shoe to drop and it never drops.
166
:And it never drops.
167
:Right?
168
:And you have these, let's
say, managed futures.
169
:It was a period there where
it was annualizing at two 3%.
170
:You, you've, you have, let's say you have
a hundred percent equity portfolio and in
171
:2012, you, you sell 10% of your equities
to buy 10% of, of managed futures.
172
:Fast forward a decade, the 90% did 16%.
173
:The, the 10% that you allocated
to only analyze it too,
174
:that's really tough, right?
175
:But the way that return stacking works,
so the, the ETFs that that we run are
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:our SST return stacked US stocks and
trend manage managed future trend.
177
:And return stacked bonds
and managed futures trend.
178
:For every dollar that you give this, these
ETFs, you're gonna get a dollar of the
179
:s and p and a dollar of managed futures.
180
:So.
181
:Instead of having to make room in
the portfolio back in, let's say
182
:2012, you would've sold 10% to buy
something like RSST and that gives
183
:you, you sold 10% of, of your stocks
and then you bought it right back.
184
:With this one plus one fund you get, so
you're back at a hundred percent equity
185
:and then you have the returns of a
managed future strategy stacked on top.
186
:Um, now go through that period
where managed futures only did 2%.
187
:Well, it's whatever.
188
:That's because we're stacking it.
189
:If the s and p did 16% annualized
this, this return stacked idea
190
:would've done 16% annually plus an
extra two, you're actually, it's
191
:actually 2% is a lot of money.
192
:And then if you fast forward to
:
193
:35% and then futures are up double
digits offsetting most of the,
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:most of the losses, if not more.
195
:Then all of a sudden you're like, okay,
that's an easy way for me to bide my
196
:time to allow diversification to work.
197
:Right?
198
:And of course, in between that decade,
there was one or two years where,
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:where managed futures was negative.
200
:But, but again, from a behavioral
perspective, if you hold that one
201
:plus one pre-package solution s
and P's up 20 and it s down four,
202
:that prepackaged solution is up 16.
203
:A few people will complain
about that, right?
204
:It, it becomes a much
easier line item to hold.
205
:And I think, you know, diversification
is always better when mixed in
206
:with other things at Zig when
they zag behaviorally, right?
207
:Much like how private equities become
really easy to hold because they
208
:smooth out returns over 18 months.
209
:It's still equities, but they just,
the packaging is easier to hold.
210
:I think return stacked, uh, solutions
is also easier to hold and, and will
211
:be a bit of a revolution going forward.
212
:Interviewer: What are
the mechanics of RSST?
213
:Rodrigo Gordillo: Let me walk
you through the simple mechanics.
214
:Let's start with RSST.
215
:When you x-ray the holdings, what
you'll find it is that you'll
216
:have, we'll have bought 75% of
the vanguard, uh, US large cap.
217
:Okay, so just, we're, we're actually
buying straight up another ETF that
218
:has the tax advantages and so on.
219
:25% is remains in cash.
220
:We're gonna use that 25% as collateral.
221
:To then top up the rest of the US
equity that we need by buying the s
222
:and PE mini futures contract, right?
223
:So we only have to, in reality,
put like three 4% margin down
224
:to be able to get a full.
225
:Exposure to the s and p.
226
:So we have 75% in, in NETF, 25%
in an s and PE mini contract.
227
:Now we have our full a hundred
percent exposure to the s and p 500.
228
:Right?
229
:That's step one.
230
:That's how you get what you need.
231
:That's how you give the
clients what they want.
232
:Now, how we give them what they
need, which is a diversification.
233
:Well, we still have $25 as of margin
that we could use to go long and short.
234
:All of those different asset
classes that we talked about.
235
:Uh, we really don't need 25%.
236
:It's just a good buffer to have in case
there's, you know, margin requirements go
237
:up and down over time when crisis goes.
238
:Um, when we have moments of crisis
and we need more margin, 25 is
239
:more than necessary for our needs.
240
:Uh, but most of the time you're using 10%
margin, uh, in order to get full exposure
241
:to a managed future trading strategy.
242
:And, and then we trade that every day.
243
:We rebalance that managed futures.
244
:Strategy every day.
245
:We trade it on an ongoing basis.
246
:We keep the one-to-one exposure
between the two strategies every day.
247
:So that's, we're really not
using the ETF as collateral.
248
:We're using the cash, the
25% cash as collateral.
249
:And the same thing goes with RSBT, right?
250
:In that case, we're topping it
up with, uh, US Treasury Futures.
251
:Interviewer: How does return
stacking for outperformance work?
252
:Rodrigo Gordillo: Most
advisors that I know.
253
:Are now kind of transitioning into this
period where they're, they're trying
254
:to find a little bit of excess returns
by picking better stocks or picking
255
:managers that pick better stocks to
try to outperform the equity markets.
256
:And the same thing goes
for fixed income, right?
257
:So you got the 60 40 portfolio,
and we're trying really hard as in
258
:the advisor community to, to, to do
stock picking for our alpha, right?
259
:Alpha is just, did you outperform the,
the market at the same level of risk?
260
:And as we know from the SPI O reports,
you know, this is really hard to do.
261
:It's number one, it's, you know, if you
look at the top quartile of managers
262
:over the last 15 years, you're looking
at outperformance of one in a bit.
263
:And then that's assuming that those top
quartile managers are going to continue to
264
:outperform by one in a bit over the next.
265
:15 years.
266
:Right?
267
:Which we know that doesn't tend to happen.
268
:So getting excess returns by
stock picking and bond picking.
269
:I think in the most competitive
landscape, the most liquid market
270
:of the end, s and p five hundreds
and PTs X 60 is really, really hard.
271
:Alright, so there's still the
desire to outperform at 60 40.
272
:But maybe there's another way to
try to do that, and this is by the
273
:concept of return stacking, right?
274
:Where you can say, okay, look, I'm
not gonna try to pick stocks anymore.
275
:I'm gonna give you 60 40.
276
:So we're gonna get the market and then
I'm gonna stack these diversifiers on
277
:top, like managed future trend following.
278
:We think it will add an extra
two to 300 basis points a year.
279
:That's, that's two to three times
and it's more consistent because it's
280
:designed to be an absolute return product.
281
:It'll be up seven outta 10 years, or
it has historically, and we expect
282
:it, uh, we have high expectations
that it'll continue to do so.
283
:And so, you know, most
years you'll be able to.
284
:Stack a positive outcome to the
60 40 and use return stacking as
285
:a an a return enhancer, right?
286
:So we call like return stacking
for out performance, and that's
287
:when you're, you're doing 60
40 and let's say 20, right?
288
:Where you sell 20% of your equities
by something like RSST and then
289
:you get your equities back plus
an extra 20 percentage trend.
290
:Or you could do 10% equity,
sell 10% bond sell by RSBT.
291
:10% by R SST for 10%, you get your 20%
right and then you get the benefit of
292
:this return stacking for out performance.
293
:Right?
294
:Again, it doesn't happen every year.
295
:Um, last couple years have been, we
had, you know, trend following, had
296
:double digit returns in 2022, and it's
been kind of flat to down since, right?
297
:So it doesn't happen every year, but most
years you're gonna do it more consistently
298
:than we've seen in this topic.
299
:Interviewer: What's the potential excess
return of stacking managed futures?
300
:Rodrigo Gordillo: When you're trying
to pick stocks, oftentimes you have
301
:to concentrate your holdings and.
302
:What you'll see is you're taking more
of the same idiosyncratic risk, right?
303
:Your equities need to live in an
environment where it's growth oriented,
304
:and if there's a bear market, you,
it doesn't matter how much your
305
:alpha has been, you're gonna go down
with the rest of the market, right?
306
:So when you're trying to pick securities,
you often take more variance, more
307
:volatility, and more downside.
308
:The interesting thing about stacking
managed future trend is that, yes, you're
309
:using leverage and to get an extra 20% on
top, so you're getting your 60, 40, 20.
310
:But that 20 is, has such a characteristic
that when trends are prolonged and
311
:and persistent, like in oh eight,
like in:
312
:they tend to to offset losses.
313
:So in the worst bear markets, when you
look at managed futures indices going
314
:back to 2000 in every bear market,
they've had an ability to reduce your
315
:maximum draw down while using leverage.
316
:And we call that
defensive leverage, right?
317
:Um, you, you, we always talk about
leverage of everybody has a leverage
318
:aversion, but we need to define what
good leverage is and bad leverage is.
319
:We say that you, you don't, you
want to avoid lice, you know,
320
:leverage that is, um, that is
illiquid, concentrated and excessive.
321
:And uh, and that's what you tend to
have when you pick stocks and you
322
:concentrate or when you do the two x
ETFs when you're using leverage that is.
323
:Non-correlated.
324
:It is diversified, it's not
excessive, and it acts as an
325
:offset during the worst of them.
326
:So I think that that's the concept for
us on return stacking for returns, for
327
:excess returns through out performance.
328
:Interviewer: What is the risk management
benefit of stacking managed futures?
329
:Rodrigo Gordillo: If you double exposure
to the same risk, like if you, if you
330
:do the two XS and P 500, you don't
get double the return over time.
331
:And that is a simple mathematical
reality, and it's due to the
332
:compounding effect of higher volatility.
333
:The higher the variance, the lower
the compound rate of return, right?
334
:So the question is, how
can I increase my return?
335
:While not increasing my volatility,
and because of the non correlation of
336
:managed futures trend, you can, let's
say, you know, you can, you can have a
337
:hundred percent s and p and then another
a hundred percent of managed futures.
338
:Um, managed futures runs at 13%.
339
:Volatility independently s and p
runs at 20% volatility independently.
340
:But when you combine the 100
plus 100, the volatility of
341
:the combination only goes up.
342
:From 20 to 21, 20 2% right?
343
:Versus doubling your
exposure to the s and p.
344
:You are getting 40% volatility
and you're not actually, because
345
:of the variance drag, you're
getting a lower compound return.
346
:So by keeping the variance relatively
the same with that stack of managed
347
:futures, you get the benefit from
compounding effect of that ex,
348
:that diversifier on top, right?
349
:So what you wanna do is you, if you
want to use leverage to increase your
350
:returns, not increase your variance.
351
:And that's what this type of
stacks do, do really well.
352
:Interviewer: What's an example
of a practical use case for
353
:return Stacking managed futures?
354
:Rodrigo Gordillo: There are, you know,
hard diversified advisors that have
355
:been, you know, pleaded the case to their
investors to make room in the portfolio
356
:to hold these managed futures funds.
357
:And, um, and they're towing the line, but
they're feeling it at this point, right?
358
:That line item risk that
nobody can understand.
359
:It becomes really, really
difficult for them.
360
:So let's say we have an advisor that has,
uh, 10% allocation of managed futures
361
:and, um, and it's been rough to hold.
362
:Uh, but they don't wanna stack, they
don't wanna have to explain to clients
363
:that they're using leverage, that
they're stacking in an extra 20% on top.
364
:Well, what they could do instead is
they could, they could decide to sell
365
:their existing managed futures funds
that are really difficult to hold.
366
:You know, now you have $10 cash, right?
367
:You can then sell an extra
10% of your equities, right?
368
:So you have $20 cash.
369
:You buy RSST for 10%, and when you buy
that SST for 10% and you are getting that
370
:combined line item risk, the combined
line line items, you're getting back
371
:your 10% of equities and then you're
getting back your managed futures.
372
:And so the client will see $10 cash.
373
:$10 in RSST and then the rest of their
portfolio, they'll see it as, oh,
374
:we're being very conservative here.
375
:We got rid of that terrible line item.
376
:Um, we got this thing that is giving
me similar returns to the s and p
377
:plus some more, which is interesting.
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:And I have $10 cash that I
guess my advisor can use it for.
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:When there's blood on the streets,
you can, you know, buy stocks when,
380
:if there's a big draw down for
you to double down or you can just
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:simply keep it in high yielding cash.
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:Right?
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:But when you x-ray that portfolio,
yeah, it's dry powder, right?
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:But when you x-ray that portfolio, what
the client's actually getting was the
385
:original portfolio they had, they just,
it's an in an easy to hold package, right?
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:They, they, you x-ray it, you get
your, you know, 90% of what you had
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:before in the 10% managed futures.
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:But they see cash, RSST and the rest.
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:And so you don't need to use
leverage in your client's portfolios.
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:Uh.
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:To use return stacking it, it is,
there is a way to even, to make it
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:very conservative, just as, just as
conservative, but the one key benefit
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:is that masking the line item risk that
always is difficult to hold behaviorally.
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:So that's the, there's, there's return
stacking for, for outperformance and
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:return stacking for diversification.
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:And those are the, the, you know,
really neat, neat ways to look at it.
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:Interviewer: Where can we learn
more about return stacking?
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:Rodrigo Gordillo: I think the world of
investing and advice is going to change
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:now that we can do what I just described.
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:Right, and, and we're, we're
focusing here on managed futures
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:trend, but there's a lot of things
one can stack and, um, and there's,
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:there's a lot more to explore here.
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:So I encourage everybody to,
to go to return stack.com
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:and learn a bit more about what
are the possibilities here.
