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.
In our conversation with Corey Hoffstein, CIO, at Boston-based Newfound Research we discuss three axes of diversification:
What, How, and When?
The 'What?' aspect involves deciding what you're going to invest in. 'How?' is where you decide what process you'll use, e.g. stylistic tilts, value, momentum, 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 luck seems to have a disproportionately low amount of consideration.
As we discuss timing luck, you 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 range of investment returns due to the variability of 'when' the invested, or rebalanced into given investment holdings.
Corey Hoffstein eloquently describes how advisors, allocators, and other investment professionals can reduce or eliminate timing luck from portfolios, which we know, can more frequently go against us, 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 Liquidity Cascades, coined by Corey Hoffstein. This 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 to do to navigate through them. We talk about how to construct tactical portfolios that 'smoothe' out the heavy drawdowns across financial markets, as experienced in Q1 2020.
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Where to find Corey Hoffstein:
Where to find the Raise Your Average crew:
Pierre Daillie – https://www.linkedin.com/in/pierre-daillie-advisoranalyst/
