Takeaways from Ep. 10 with Corey Hoffstein, CIO, Newfound Research:
• Thinking of diversification in portfolios in terms of three axes: What, How, and When?
• The unintended consequences of 'timing luck' (re: 'when?' diversificatio)
• How to reduce 'timing luck' from portfolios
• How rebalancing premium trumps "timing luck"
• Market distortions caused by the shift from actively managed funds to passive funds
• What are 'Liquidity Cascades," and how to 'smoothe' against unforeseen destructive convergences of trading activity in markets.
'Luck' is a double-edged sword which, if you're an allocator of capital, can, more often than not, disadvantage you in investing and asset management.
Corey Hoffstein, Co-Founder and CIO at Newfound Research joins us for a profound conversation on 3 aspects of diversification: What, How, and When?
The 'What?' aspect involves deciding which assets will be used in a portfolio. 'How?' is where you decide what process you'll use, e.g. active, passive, systematic or rules based investing, and factors, etc. The 'When?,' aspect is the consideration of timing, or rather, 'when' you choose to invest, or rebalance.
While luck plays a role in all three aspects of diversification, of the three aspects, timing is the one that gets the least amount of consideration, and timing luck seems to have a disproportionately low amount of consideration, where risk management is concerned. Quick question:
A couple of questions – As an advisor:
1) How much do you want to depend on luck to be a factor in your success as an investor?
2) Are your clients investing their faith in you because you are lucky or because they believe you are skilled at making investment planning decisions?
As we discuss the luck of timing, you'll come to realize how the luck of timing, with all else being equal, i.e. multiple managers using, for the sake of argument, the exact same investment strategy, and even the same holdings can wind up experiencing a wide dispersion of returns due to the variability of 'when' the invested, or rebalanced into given investment holdings.
Corey Hoffstein describes in eloquent fashion, how advisors, allocators, and other investment professionals can reduce or eliminate the timing luck from their portfolios, which can cut both ways, and instead harvest the 'rebalancing' premium. If you're at all wondering about the ways in which you could establish greater advisor alpha, rebalancing and the rebalancing premium are among the most valuable and manageable ways to do so, and in turn, reduce the occurrence of when 'timing luck' can turn against you as an allocator.
Our conversation then turns to the subject of Liquidity Cascades, a term coined by Corey Hoffstein last year, which has gotten an enormous amount of attention from portfolio managers from across the quantitative and fundamental investing worlds. It is his well-researched findings of what have culminated in more recent times as unforeseen destructive convergences of trading activity in markets, how they occur, and what you can do to navigate through them. We talk about how to construct tactical portfolios that 'smoothe' out, and protect portfolios during the heavy drawdowns across financial markets, as experienced in Q1 2020.
Full transcript: Coming soon
Where to find Corey Hoffstein:
Where to find the Raise Your Average crew:
ReSolve Asset Management - https://investresolve.com/
ReSolve Asset Management Blog - https://investresolve.com/blog/
Mike Philbrick - https://www.linkedin.com/in/michaelphilbrick/
Rodrigo Gordillo - https://www.linkedin.com/in/rodrigogordillo/
Adam Butler - https://www.linkedin.com/in/adamdbutler/
Pierre Daillie - https://www.linkedin.com/in/pierre-daillie-advisoranalyst/