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Corey Hoffstein

lines on the record: 156
first: 2024-11-21
most recent: 2024-11-21
sittings or episodes: 1
sources: podcast

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“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“So, this is where I have my own strong personal views. 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. 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 your big macro traders would try to capture in a more discretionary fund. What's really, in my opinion, attractive and appealing about”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Folks like Jonathan Gliddon, 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”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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, 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. And PS on volatility laundering, to steal a quote from Cliff Asnes, 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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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 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. And they 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. True.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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 rate of 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? So, as you can imagine, post 2008, this concept, which was, I think, if I'm correct, I think it was 25% of major U.S. pensions and institutions were implementing portable alpha pre-2008.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“And the hedge fund said, Well, bad news. Not only have we lost money too, but we're gaining redemptions. You can't have your money back. So all of a sudden, they try to rebalance to meet their margin calls. And what they had invested their cash in was not giving them their cash back.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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&P 500, and the S&P 500 lost 50% from 2007 to the bottom in 2009. And change, and you only posted 5%, 10% as collateral. Getting a margin call, so you did better if you stacked it on bonds. Not so wealthy stacked it on equity. 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? Rebalance your portfolio basically, that's what you have to do. So they went to all the institutions, went to the hedge funds.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“And what's interesting is when you think about it, what the math does is I say, okay, I'm getting the SP 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&P 500 instead of fishing in the same pond as everyone else. But what happens during a crisis?”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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 SP 500 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&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. Maybe the hedge fund does relative value volatility trading. Something with some sizzle, right?”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so let's talk about 0809. And let's talk about why we don't call this portable alpha and why we've rebranded it as return stacking”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly. So you could say instead of buying a million dollars of the SP 500, I'm going to take $50,000, use it as cash collateral to buy S&P 500 futures, a million dollars of S&P 500 futures, which will give me the total return.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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&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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Or you can go to the bank and get a mortgage, put $200,000 down, get an $800,000 mortgage. You're going to get the return of the house minus whatever the cost of financing is. And then you're going to have $800,000 in cash, which you can do whatever. If you were to take that $800,000 in cash and invest it in, say, mortgage-backed securities, 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 and say gold, well, now my return is going to 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”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think 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. Say 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”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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?”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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 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 decades, which means that when the diversification benefits eventually come around, their performance chasing. And so you see these huge, what are called behavior gaps in the returns of alternative”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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. Have that portfolio, or at least keep up with over the long run for that portfolio to not underperform the benchmark, right? So if you do that.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, to put gold in the portfolio, it's not just addition. Diversification is a problem of addition through subtraction. What do you say?”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“What problem are we trying to solve here first and foremost right? 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. Bit of a mouthful. So, what do I mean by that? 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 Mr. and Mrs. Jones. You are 60-40 investors, 60% stocks, 40% bonds. We think that we want to go beyond that and introduce diversifying assets or diversifying strategies. It's going to use gold as an example.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“To be able to look at this. 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. Because if I can predict a recession and I know value works, I've outperformed the market. So, you know, there's an inherent limit here based on how efficient you think the market is. And I'll tell you, I think the market's pretty darn efficient”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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 value portfolios are stuffed with financials. And value just got destroyed.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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. Right.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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&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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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 going to do? And he was a small cap value manager. And he said, nothing. My job is to provide small cap value exposure. If it's not appropriate 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 in the downside. Value had worked incredibly well in the dot-com era, but my thought there was there 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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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 bald. How does that behave, right? Versus, oh, these all have positive momentum”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, and I'm sympathetic 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 backtest 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 backtests 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 easy to.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Finra, Finra, one of the other regulators. Prohibits you from showing a back test for a mutual funder, 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 MSC. 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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“I think my view of this has changed over time. I've become, I've always been very skeptical of Backdest 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. 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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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. Options market makers. I mean, they really, when you... You talk about what is quant, right? What you learn. You learn everything from how to price structured products. You learn the math that can help you 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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, the other side did not end so well, as you can imagine. They were bankrupt a year later in $25 billion flew out to the wind.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Stopped calling. They stopped calling and then you ask for a letter that says, Hey, can I get some resolution? And they say, we've determined We're not pursuing further inquiries into you. And so I've got a nice letter framed from the SEC that says precisely that.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“No issues So, I mean, anyone who's gone through this, so I suspect the vast majority of people have not, you eventually, the SEC never says you're all right.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“I got subpoenaed. My life got caught up in this SEC investigation. And I said, all right, I've got two choices. I can leave this industry and go move to Silicon Valley. I got a computer science degree. There's some good stuff going on out there, or I can plant my flag and prove to people I did nothing wrong. 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 something real here. Had a couple 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 nothing, there's no fraud here. We were not the problem.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Oh, they stopped paying me at that point. Oh, they did. They stopped paying me. Needless to say, the SEC ran a very aggressive investigation.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“And the gentleman who ran the firm that was my client was so convincing to the industry that he had done nothing wrong. During the SEC investigation, he grew the business from twelve billion to twenty five billion dollars”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Just a routine exam. You know, you run an RIA, the SEC just comes knocking every once in a while to say, hey, you just want to make sure the compliance program is all set up. It happens every once every couple years. 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. Kick the tires with what should have been a very routine 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 record.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes. And by the agreement, 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. Right. 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. Show us the trade record.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“And you got to 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. Miscalculated that back test and then ran around telling everyone it was a live strategy.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“So that was a lot of stumbling in the dark candidly. 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'd say, I can't tell you.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“Started to add up, and it afforded me the opportunity. What was interesting is this was a big transition time in Wall Street where A lot of the jobs I had been trained for when I went through that graduate school program, who, by the way, today looks nothing like the program I went through. It was all about pricing credit default swaps. 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. 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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source
“I didn't even know what a basis point was. And so 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.”
2024-11-21 · Masters in Business · The Concept of Return Stacking with Corey Hoffstein · IDENTIFIED FROM THE TRANSCRIPT · source