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I think there's kind of a technical definition
of what care is, and then there's the kind of
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colloquial definition.
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I think people often, people have heard of
Carrie in the financial industry, maybe
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associate Carrie with a strategy that was
fairly common in the early 2000s, the carry
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trade, which typically was constructed by
borrowing in funding currencies with low
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interest rates like the yen, and for a long
time, the US dollar to invest in currencies
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with higher local interest rates, which often
are emerging market currencies, think the
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Brazilian real or the Mexican peso or what have
you.
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Though it can also be in developed market
currencies.
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It's just typically that the spreads are a
little bit lower.
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But the idea is, let's say you're borrowing a
2% to invest in a currency where the cash rates
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are 4%, and you're gonna earn that two percent
return as long as the price of the currency
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doesn't change against you.
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So during pro cyclical periods, which is kind
of 80% of the time when markets are, you know,
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risk seeking, investors are deploying their
capital, hoping for a return on investment,
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then those carry trades tend to be highly
profitable.
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And historically in the currency carry trade,
kind of 10 to 20% of the time, when investors
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are more concerned with return of capital
during risk off periods, they tended to go
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against them.
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So the currency carry trade was often
associated with having these fat negative tails
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where most of the time you're doing really
well, and then some of the time you give back a
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lot of the returns that you earned while you
were doing well.
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And so that's just one kind of narrow
expression of a broader concept of carry.
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We like to think that carry as a technical
definition is just the return that an investor
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expects to get on an investment if the price of
that investment doesn't change, right?
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So if you buy an apartment building, you're
gonna rent out the apartments in that building.
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You're gonna borrow from the bank in order to
buy that apartment building, and you're gonna
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collect rents.
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Presumably the total sum of the rents is gonna
be higher than the interest that you need to
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pay the bank or the cost of capital on that
investment.
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That difference is the carry on that apartment
building.
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In a stock portfolio, the carry is the dividend
yields that are paid out by the companies.
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So even if the value of the stocks in the
portfolio don't go up, then you're still
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earning this constant income from the dividends
that are getting paid.
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This is perhaps most familiar for bond
investors.
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Obviously you invest in a bond.
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Well, can borrow cash to invest in bonds.
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Typically bonds have a higher yield than cash,
either because they've got credit risk or
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because you're looking to lend money for a
longer horizon, like cash, you can get your
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money back right away.
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You know exactly what the value is gonna be.
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But if you lend your money ten years, interest
rates may change in the meantime, inflation may
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change in the meantime.
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And so typically you need to be compensated
with a higher yield to lend money for ten years
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than you would just to lend money overnight in
the cash markets.
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So that is also a carry trade.
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And then there's also a carry investing in,
commodity futures.
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It's a little more nuanced that requires a
little more explanation.
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But the idea here with the carry trade or carry
strategy that we're, big fans of is that we're
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not just investing in currencies and absorbing
that kind of, pro cyclical risk, rather they're
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investing in a wide variety of different asset
classes.
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And because those asset classes tend to have
their best and worst returns in very different
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economic environments, They tend to balance
each other out.
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And while it's far from a risk free strategy,
you do get an enormous amount of benefit from
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that cross asset diversification.
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So you're picking up dividends, coupons, and
convenience yield from commodities, and this
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positive carry yield differential from
currencies, all in one broad portfolio.
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And they just, you you never have, you never
all jumping on one section of the trampoline,
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rather you're jumping at different times on
different sections of the trampoline, and it's
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a much more comfortable ride.
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In order for markets to entice you to come out
of cash where you know the value of that cash
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is going to be tomorrow, you can use it for
consumption today, in order for the markets to
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entice you to invest your money in something
risky where you don't know what the value is
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going to be tomorrow, where there is some price
risk if you try to redeem before maturity, then
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typically the markets need to pay you a higher
expected returns, right?
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Stocks pay you dividends, bonds pay you a
coupon in excess of the cash rate.
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Higher risk currencies or currencies are
experiencing higher inflation or higher
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inflation risk will often have a higher
interest rate, right?
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So investors need to be compensated for putting
their money in those different areas.
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And that compensation is carry.
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The primary bet that we're making is that on
average, investors would prefer to put their
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money in higher yielding equity markets than
lower yielding equity markets, higher yielding
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bonds than lower yielding bonds on a risk
adjusted basis, right?
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I mean, obviously if a market is perceived to
be much higher risk, then it needs to pay a
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higher return.
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And the risk adjusted expected return might be
the same as a lower yielding market that has
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lower risk, right?
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So really what we're trying to do is emphasize
markets that are getting paid more or that are
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paying investors more for the same level of
risk and deemphasizing markets that are paying
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investors less for the same level of risk.
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And importantly, sometimes markets actually are
paying or giving negative expected returns.
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So you can imagine from 2022 until some point
in 2024, we had an inverted yield curve.
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So investors were actually willing to lend
money for ten years at lower rates than where
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the Fed was holding cash rates.
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00:07:04,979 --> 00:07:08,339
So in that case, you're able to get better
returns on cash.
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You're actually better to borrow at the ten
year rate and invest in cash.
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And so sometimes you want to be actually short
bonds.
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Sometimes the dividend yield on equity markets
are way below the dividend yield on ten year
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treasuries or even on cash.
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And so you want to be short equities and long
cash or long treasury bonds.
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00:07:33,564 --> 00:07:39,060
And sometimes commodities have inverted curves
as well, which means that you get paid for
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being short instead of being long, right?
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So this is a long short portfolio that really
is just trying to position into markets to
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maximize the absolute level of risk adjusted
carry, whether that carry is long or short.
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Let's call it an uncorrelated strategy because,
you know, sometimes people perceive absolute
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return as being very, very low risk.
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You know, like you kind of expect that the,
portfolio is just gonna go up almost every
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month, right?
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Carry strategies, know, you can set them to any
sort of risk target you want.
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The diversification does an enormous amount of
work in order to manage that level of risk.
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But you still definitely get a ride, right?
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As you wait for markets to settle into and or
find equilibrium moving towards markets that
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pay higher risk adjusted carry.
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But markets move in the short term for a
variety of different reasons, and investors are
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not always only concerned with seeking the
highest carry differential.
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Sometimes they're fleeing risks.
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Sometimes they're in high speculation mode and
they don't really care about what the yield is
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because they think there's gonna be a buyer or
buyers who come in soon after and continue to
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push prices even further away from equilibrium.
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There's a variety of different reasons that
markets can dislocate from the direction that
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you'd expect if carry was the only thing that
investors cared about all the time, but they
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don't.
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And therefore you absolutely do get these
fluctuations.
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Investing in corporate bonds is a carry
strategy.
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Investing in high yield bonds is a carry
strategy.
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Investing in duration is a carry strategy.
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Investing in dividend stocks is a carry
strategy, but they end up being these highly
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concentrated portfolio bets, right?
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So what we try to do is we say, well, we're
gonna use futures markets to invest in the
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global equity indices with the highest risk
adjusted yields, the global government bond
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markets with the highest risk adjusted yields,
the global currencies with the highest risk
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adjusted yields, and the global commodities
with the highest risk adjusted yields in the
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direction that they are currently paying those
yields.
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And as a result, because sometimes we're long
and short, different equity indices, long and
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short, different government bond indices, long
and short, different currencies and long and
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short, different commodities, it ends up having
a diversified global carry strategy, ends up
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having a very uncorrelated return stream
relative to traditional allocations to equities
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or bonds that most investors would have in the
portfolio.
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To answer your initial question about how
accessible these strategies carry has
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traditionally been, well, currency carry
strategy was traditionally an institutional
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only strategy, right?
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That's in by pension funds, by hedge funds.
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Eventually many institutions brought that in
house.
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They made them a little bit more sophisticated.
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So to this day, many institutions do run large
currency carry books.
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Many institutions, though probably a much
smaller number, run diversified carry
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strategies.
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But it has traditionally been very difficult
for retail investors or smaller investors to
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get access to the global carry style strategy
that, we offer in the return stack family.
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But they could get some exposure to it by
investing in managed futures funds or managed
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futures indices.
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Typically, futures are known for their
deploying trend following strategies.
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And it's still true to this day that the vast
majority of the returns to managed futures are
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explained by trend following.
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But what we've observed in our own research,
and there's been other studies that confirm
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this, is that over time, many ministry
strategies have also begun to add in carry
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signals into their trend following strategies
because carry is a really nice natural
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diversifier to trend.
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You know, trend typically tends to, chase into
the extremes of trends.
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And often at the extremes of trends, the carry
gets quite negative.
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The market gets quite extended away from the
natural kind of economic equilibrium.
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00:12:28,899 --> 00:12:36,899
And so adding some carry to a trend strategy
can do a nice job of balancing out the most
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extreme elements of trend.
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And in fact, if you look over the very long
term, the diversified carry strategy and
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diversified trend strategy end up having a
relatively low correlation in the neighborhood
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of kind of 0.3, 0.4.
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So there's just really nice compliments for one
another.
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As an example, if you are an American investor
or Canadian investor and you invest in European
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stocks and Euro cash rates are substantially
lower than Canadian cash rates.
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Well, you implicitly are expecting a negative
carry on the currency even while you're
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investing in your European equities.
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That's often an unintended bet, right?
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If you own a carry strategy, then
definitionally, almost definitionally, are some
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risk elements involved, but all things equal,
that carry strategy would do some of the work
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in hedging the negative passive carry that that
investor would have in owning those foreign
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stocks under that condition because the carry
strategy wouldn't actually be short the Euro
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00:13:46,975 --> 00:13:53,629
and long the Canadian dollar, for example, in
the example that I gave, right?
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00:13:53,870 --> 00:14:00,350
So it does sort of make explicit all of the
bets in the portfolio and make sure that you
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are properly positioned to harvest carry in the
right direction at the right time.
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You're making explicit, many bets that were
implicit, and you're managing them directly
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rather than unmanaging them.
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I think a really, an easy example is think back
to 2022, obviously 2022, 2023, much of 2024, a
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really rough ride for bond investors because
even for corporate bond investors, think about
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the Bloomberg, Barclay aggregate index, the
corporate bond index, right?
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Well, has a duration of about eight, nine
years.
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And the, so you're getting compensated for both
a positively sloped interest rate curve and for
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the credit risk that you're accepting for
investing in corporate bonds, right?
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Well, that's nice most of the time, because
most of the time the interest rate curve is
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positive and the credit yield is positive,
right?
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00:15:08,195 --> 00:15:13,154
But for 'twenty two, 'twenty three, and much of
2024, the interest rate curve was negative,
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00:15:13,315 --> 00:15:13,554
right?
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00:15:14,179 --> 00:15:20,419
So if you own a basket of corporate bonds, then
if you also want a carry strategy, what you
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have is, in the bond portfolio, your long
credit risk and your long duration.
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In the carry strategy, your short duration,
right?
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Why?
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Because you've actually got a negatively
sloping interest rate curve.
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And so you've got negative carry on this
duration debt, right?
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00:15:41,684 --> 00:15:49,259
So in that way, you're sort of partially off
setting much of this negative carry exposure
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00:15:49,259 --> 00:15:55,500
that you have in your normal portfolio by
investing in this diversified carry strategy,
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00:15:55,659 --> 00:16:00,779
because it's just reducing the negative carry
on the duration element of your corporate bond
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00:16:00,779 --> 00:16:01,179
portfolio.
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00:16:05,884 --> 00:16:09,164
There's obviously hedge funds that offer carry
strategies.
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You can get a carry strategy if you're an
institution, you wanna sign an ISDA with a bank
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and get access to their QIS strategies.
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00:16:17,170 --> 00:16:19,090
Other than that, you're kind of out of luck.
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We're just trying to democratize hedge fund
strategies.
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Managed futures trend, same thing.
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00:16:28,450 --> 00:16:30,050
Historically, a two in 20 strategy.
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The managed futures carry, historically a two
in 20 hedge fund strategy.
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00:16:34,855 --> 00:16:41,735
And carry is an order of magnitude more
complicated from a data management architecture
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standpoint.
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00:16:42,455 --> 00:16:44,470
You've gotta get, it's not just prices, right?
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For trend following, all you need is futures,
continuous futures prices.
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For carry, you need to have the forward points
curve for currencies.
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00:16:53,990 --> 00:17:00,534
You've gotta have the cash curves for a variety
of different global government bond interest
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rate markets.
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00:17:01,335 --> 00:17:06,934
You've gotta have all the liquid contracts all
through the back end of the curve for all the
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00:17:06,934 --> 00:17:07,894
commodity contracts.
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So like, it's a much more data heavy
architecture than most strategies.
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And that might explain why it's not quite as
popular.
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00:17:21,210 --> 00:17:28,505
It takes a lot more work to build and deploy
and then generate daily signals for a carry
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strategy than it does for most other
strategies.
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00:17:31,224 --> 00:17:36,105
So we had already done the work many years ago
for our hedge fund strategies.
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And we just took a component of that and made
it available at non hedge fund fees to any
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00:17:44,900 --> 00:17:48,339
retail investor or advisor to add to their
portfolio.
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So we feel pretty good about that.
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A big challenge over the last ten or fifteen
years is that global equity markets, for
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example, have kind of gone straight up.
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There've been a few blips over that period.
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But for the vast majority of the time, it's
been just a really nice tailwind for global
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equities.
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And so investors year in, year out often
experience this regret.
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So while the advisor understands that it's
prudent to spread the investors' capital across
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a variety of different prospective sources of
return where they're not all expected to earn
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the returns at the same time for the same
reasons.
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That's why you diversify.
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But the investor is left feeling every year,
well, I didn't quite do as well as my friends
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who maintain their concentrated position in the
global equity markets.
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So there's this regret that builds up over
time.
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So any attempt to kind of sell down your
equities in order to make room for a
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diversifier ends up being egg on the advisor's
face.
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So what return stacking acknowledges is that
investors typically don't want to sell down
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their beloved equity and bond allocations.
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When they go to dinner parties, they don't want
to feel like they're underperforming their
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neighbors or their friends or their family,
right?
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So we don't want to force them to reduce the
things that they know and love in order to take
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the healthy medicine of diversification.
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So return stacking builds portfolios that give
you back the full exposure to the underlying
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equity or bond index that clients wanna keep,
and stack a completely diversified strategy on
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top, right?
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So stack a managed futures trend following
strategy, stack a managed carry strategy, stack
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a merger arbitrage strategy, soon stack gold
and Bitcoin, for example.
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Just things that move to a different drummer
for different reasons at different times, stack
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it on top so that the client doesn't need to
give up the returns and the experience that
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they want capturing the growth of their core
assets.
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But they do get the advantage of the
diversification during those inevitable
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periods, which historically have often lasted
many years, often a decade or more at a time
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where equities have underperformed cash with a
very painful ride along the way.
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Well, then they're very happy to have this
added exposure on top that in many cases
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historically has gone on to do just exceedingly
well precisely during those periods when the
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core markets struggle.
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At the moment, investors are making decisions
that are not really guided by their short term
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economic self interest, but rather are guided
by other motivations, either geopolitics or
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what have you.
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And what that means is that in some cases, the
markets have become quite dislocated from their
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economic equilibrium.
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And we like to think of that as potential
energy in the portfolio, right?
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Like the investors in the carry strategy over
the last year have spent a lot of energy
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rolling the boulder up the hill, right?
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And at some point then the conditions will
change and that boulder will roll back down the
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hill.
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Historically, we see that after periods of
like, you know, a year or two of struggle, that
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the carrier strategies do go on to produce some
of their best returns over the near term,
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right?
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So, you know, it could be, quite a prospective
time to start allocating to carry strategies.
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It may not look as attractive, over the last
year or so, if you look at the chart, but
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that's, you know, carry is one of these
strategies that can build this potential
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energy.
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It's just like a value portfolio.
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When it goes down, the companies that just get
cheaper and more attractive, right?
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Well, carry has this same kind of quality to
it.
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And in many ways, the carry portfolio of today
is more attractive with potentially higher
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expected returns over the next year or two
because of it than, you know, when we launched
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a year or so ago.
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So there's something for investors to think
about.
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Yeah, I think that's one of the greatest
benefits of the Returns Stacked suite is that
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the diversification is kind of cloaked by the
underlying exposure to the core asset class,
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right?
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And stocks or bonds.
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And so it's harder for investors to kind of
agitate or get grumpy because if the core asset
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class has had a nice rise, in all likelihood,
the carry plus that asset class portfolio has
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also experienced a rise.
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And even if the carry has had a negative
return, it's just kind of attenuated that
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positive return on the underlying core
allocation rather than looking like a line item
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on the portfolio with a negative return.
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And from an emotional standpoint, that could be
a world of difference in conversations with
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clients and their motivation, incentive, and
sustainability in sticking with it.
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We can judge that by historical simulations,
which have been very strong.
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But in general, I think it's healthy from an
expectation standpoint for investors to kind of
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think about these diversifiers as having the
same approximate long term expected return per
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unit of risk as equities or bonds or other
types of risk premia or strategies that they
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might think about allocating to, right?
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So the long term excess risk adjusted return
for global equities is in the neighborhood of
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0.35 to 0.4.
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It's about the same for bonds.
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I think we could probably say the same thing
for a managed futures trend, or a managed
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futures carry, or merger arbitrage strategy,
which are some of the other strategies that we
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are stacking.
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So we run the carry strategy at about a 10%
volatility.
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So we might expect a three to 5% excess return
over the long term from an allocation to carry,
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just as we would expect similar returns at that
same volatility for an allocation, a stack to
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trend or a stack to merger arbitrage.
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So an extra 0.3 to 0.5% a year on average long
term at a 10% allocation.
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The track record on stock picking is not very
good, right?
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If you look at the SPIVA annual reports,
typically somewhere between 7095% of active
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managers underperform.
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00:25:28,855 --> 00:25:35,334
And the managers that have outperformed over
the past one, three, five, ten years actually
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typically go on to underperform over the next
three to five years.
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So it was just very difficult to find active
managers like that are stock pickers or bond
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pickers that have a high likelihood of
outperforming.
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So, you know, these are just uncorrelated
strategies that are in the macro space, they're
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not nearly as picked over.
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I like to say 99% of all cognitive and
computational resources in markets go towards
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choosing the best stocks or choosing the best
bonds.
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00:26:09,079 --> 00:26:18,039
And there's almost no effort or resources
allocated to how much WTI crude oil should I
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00:26:18,039 --> 00:26:26,234
own relative to Brent crude oil or German bonds
or US equities The US equities versus the
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00:26:26,234 --> 00:26:27,035
Nikkei.
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00:26:27,035 --> 00:26:29,914
So this is just not nearly as picked over.
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There used to be a rule called Samuelson's law
that says that the market is micro efficient,
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but macro inefficient.
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Micro being picking stocks within the stock
market, macro being picking which stock market,
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which bond market to own, or how much to own in
stocks or bonds or commodities or gold or
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00:26:50,809 --> 00:26:52,009
currencies, etcetera, right?
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So we believe that this is a much less
efficient space to seek these excess returns
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00:26:59,815 --> 00:27:05,589
in, like the returns are likely to be stronger
over time for each unit of risk and more
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00:27:05,589 --> 00:27:12,470
sustainable, just because there are regulatory
and institutional frictions to the deployment
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of a massive amount of capital there.
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00:27:14,230 --> 00:27:16,950
So we think it's a really good opportunity for
retail investors.
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It has very low average long term correlation
to the types of things that retail investors
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typically invest in.
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And it's just not offered anywhere else to
retail investors in this form.
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And the structure of being able to get access
to this diversification without having to give
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up the core stock and bond exposure that people
have grown to really love, I think is the gift
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00:27:43,160 --> 00:27:43,960
that keeps on giving.
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00:27:47,975 --> 00:27:53,734
The primary educational portal for return
stacking is returnstacked.com.
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00:27:53,975 --> 00:27:56,615
That's stacked.com.
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00:27:56,615 --> 00:27:59,414
There's also returnstackedetfs.com.
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00:28:00,099 --> 00:28:06,579
And there's plenty of research on managed
futures, diversification, and carry itself,
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00:28:06,579 --> 00:28:13,220
including a white paper and a long detailed
blog post on investorsall.com, on our blog.
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So there's lots of videos on Resolve's YouTube
channel, on the Returnstack YouTube channel.
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So, you know, we're doing our best to try to
cover the waterfront in terms of educational
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material for Carrie.
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And if anyone has any questions or follow-up,
then we would welcome direct questions to me at
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adam.
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00:28:34,180 --> 00:28:35,700
Butlerinvestresolved dot com.
00:00:10,480 --> 00:00:15,234
I think there's kind of a technical definition
of what care is, and then there's the kind of
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00:00:15,234 --> 00:00:16,914
colloquial definition.
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00:00:17,875 --> 00:00:24,595
I think people often, people have heard of
Carrie in the financial industry, maybe
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00:00:24,595 --> 00:00:33,140
associate Carrie with a strategy that was
fairly common in the early 2000s, the carry
5
00:00:33,140 --> 00:00:41,539
trade, which typically was constructed by
borrowing in funding currencies with low
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00:00:41,539 --> 00:00:48,945
interest rates like the yen, and for a long
time, the US dollar to invest in currencies
7
00:00:48,945 --> 00:00:54,385
with higher local interest rates, which often
are emerging market currencies, think the
8
00:00:54,385 --> 00:00:57,825
Brazilian real or the Mexican peso or what have
you.
9
00:00:58,460 --> 00:01:02,619
Though it can also be in developed market
currencies.
10
00:01:02,619 --> 00:01:04,780
It's just typically that the spreads are a
little bit lower.
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00:01:04,780 --> 00:01:10,780
But the idea is, let's say you're borrowing a
2% to invest in a currency where the cash rates
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00:01:10,780 --> 00:01:19,465
are 4%, and you're gonna earn that two percent
return as long as the price of the currency
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00:01:19,465 --> 00:01:21,704
doesn't change against you.
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00:01:23,944 --> 00:01:32,459
So during pro cyclical periods, which is kind
of 80% of the time when markets are, you know,
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00:01:32,540 --> 00:01:38,939
risk seeking, investors are deploying their
capital, hoping for a return on investment,
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00:01:39,494 --> 00:01:42,614
then those carry trades tend to be highly
profitable.
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00:01:43,015 --> 00:01:50,454
And historically in the currency carry trade,
kind of 10 to 20% of the time, when investors
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00:01:50,454 --> 00:01:55,750
are more concerned with return of capital
during risk off periods, they tended to go
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00:01:55,750 --> 00:01:56,549
against them.
20
00:01:56,549 --> 00:02:02,150
So the currency carry trade was often
associated with having these fat negative tails
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00:02:02,310 --> 00:02:06,469
where most of the time you're doing really
well, and then some of the time you give back a
22
00:02:06,469 --> 00:02:11,455
lot of the returns that you earned while you
were doing well.
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00:02:11,775 --> 00:02:17,055
And so that's just one kind of narrow
expression of a broader concept of carry.
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00:02:21,469 --> 00:02:27,469
We like to think that carry as a technical
definition is just the return that an investor
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00:02:27,469 --> 00:02:32,430
expects to get on an investment if the price of
that investment doesn't change, right?
26
00:02:32,844 --> 00:02:38,444
So if you buy an apartment building, you're
gonna rent out the apartments in that building.
27
00:02:38,444 --> 00:02:43,324
You're gonna borrow from the bank in order to
buy that apartment building, and you're gonna
28
00:02:43,324 --> 00:02:44,205
collect rents.
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00:02:44,205 --> 00:02:48,819
Presumably the total sum of the rents is gonna
be higher than the interest that you need to
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00:02:48,819 --> 00:02:51,939
pay the bank or the cost of capital on that
investment.
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00:02:52,180 --> 00:02:55,300
That difference is the carry on that apartment
building.
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00:02:55,699 --> 00:03:01,459
In a stock portfolio, the carry is the dividend
yields that are paid out by the companies.
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00:03:01,459 --> 00:03:08,655
So even if the value of the stocks in the
portfolio don't go up, then you're still
34
00:03:08,655 --> 00:03:12,175
earning this constant income from the dividends
that are getting paid.
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00:03:12,335 --> 00:03:15,215
This is perhaps most familiar for bond
investors.
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00:03:15,215 --> 00:03:16,655
Obviously you invest in a bond.
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00:03:17,210 --> 00:03:21,129
Well, can borrow cash to invest in bonds.
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00:03:21,129 --> 00:03:25,530
Typically bonds have a higher yield than cash,
either because they've got credit risk or
39
00:03:25,530 --> 00:03:32,955
because you're looking to lend money for a
longer horizon, like cash, you can get your
40
00:03:32,955 --> 00:03:33,675
money back right away.
41
00:03:33,675 --> 00:03:35,435
You know exactly what the value is gonna be.
42
00:03:35,594 --> 00:03:40,955
But if you lend your money ten years, interest
rates may change in the meantime, inflation may
43
00:03:40,955 --> 00:03:41,914
change in the meantime.
44
00:03:41,914 --> 00:03:46,580
And so typically you need to be compensated
with a higher yield to lend money for ten years
45
00:03:46,580 --> 00:03:49,459
than you would just to lend money overnight in
the cash markets.
46
00:03:49,459 --> 00:03:53,460
So that is also a carry trade.
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00:03:53,939 --> 00:03:58,340
And then there's also a carry investing in,
commodity futures.
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00:03:58,664 --> 00:04:01,704
It's a little more nuanced that requires a
little more explanation.
49
00:04:01,704 --> 00:04:09,784
But the idea here with the carry trade or carry
strategy that we're, big fans of is that we're
50
00:04:09,784 --> 00:04:15,370
not just investing in currencies and absorbing
that kind of, pro cyclical risk, rather they're
51
00:04:15,370 --> 00:04:19,930
investing in a wide variety of different asset
classes.
52
00:04:20,250 --> 00:04:24,330
And because those asset classes tend to have
their best and worst returns in very different
53
00:04:24,330 --> 00:04:27,644
economic environments, They tend to balance
each other out.
54
00:04:27,644 --> 00:04:33,245
And while it's far from a risk free strategy,
you do get an enormous amount of benefit from
55
00:04:33,245 --> 00:04:35,564
that cross asset diversification.
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00:04:35,724 --> 00:04:40,639
So you're picking up dividends, coupons, and
convenience yield from commodities, and this
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00:04:40,639 --> 00:04:46,240
positive carry yield differential from
currencies, all in one broad portfolio.
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00:04:46,639 --> 00:04:54,000
And they just, you you never have, you never
all jumping on one section of the trampoline,
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00:04:54,000 --> 00:04:58,125
rather you're jumping at different times on
different sections of the trampoline, and it's
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00:04:58,125 --> 00:04:59,564
a much more comfortable ride.
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00:05:03,564 --> 00:05:09,759
In order for markets to entice you to come out
of cash where you know the value of that cash
62
00:05:09,759 --> 00:05:15,520
is going to be tomorrow, you can use it for
consumption today, in order for the markets to
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00:05:15,520 --> 00:05:22,560
entice you to invest your money in something
risky where you don't know what the value is
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00:05:22,560 --> 00:05:28,204
going to be tomorrow, where there is some price
risk if you try to redeem before maturity, then
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00:05:28,204 --> 00:05:32,444
typically the markets need to pay you a higher
expected returns, right?
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00:05:32,444 --> 00:05:36,925
Stocks pay you dividends, bonds pay you a
coupon in excess of the cash rate.
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00:05:38,449 --> 00:05:42,449
Higher risk currencies or currencies are
experiencing higher inflation or higher
68
00:05:42,449 --> 00:05:45,410
inflation risk will often have a higher
interest rate, right?
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00:05:45,410 --> 00:05:49,810
So investors need to be compensated for putting
their money in those different areas.
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00:05:50,115 --> 00:05:52,115
And that compensation is carry.
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00:05:52,115 --> 00:05:57,794
The primary bet that we're making is that on
average, investors would prefer to put their
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00:05:57,794 --> 00:06:03,314
money in higher yielding equity markets than
lower yielding equity markets, higher yielding
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00:06:03,314 --> 00:06:07,860
bonds than lower yielding bonds on a risk
adjusted basis, right?
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00:06:07,860 --> 00:06:15,220
I mean, obviously if a market is perceived to
be much higher risk, then it needs to pay a
75
00:06:15,220 --> 00:06:15,939
higher return.
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00:06:15,939 --> 00:06:22,855
And the risk adjusted expected return might be
the same as a lower yielding market that has
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00:06:22,855 --> 00:06:24,134
lower risk, right?
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00:06:24,134 --> 00:06:30,535
So really what we're trying to do is emphasize
markets that are getting paid more or that are
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00:06:30,535 --> 00:06:36,519
paying investors more for the same level of
risk and deemphasizing markets that are paying
80
00:06:36,519 --> 00:06:39,240
investors less for the same level of risk.
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00:06:39,319 --> 00:06:46,759
And importantly, sometimes markets actually are
paying or giving negative expected returns.
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00:06:47,894 --> 00:06:56,214
So you can imagine from 2022 until some point
in 2024, we had an inverted yield curve.
83
00:06:56,534 --> 00:07:02,579
So investors were actually willing to lend
money for ten years at lower rates than where
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00:07:02,579 --> 00:07:04,819
the Fed was holding cash rates.
85
00:07:04,979 --> 00:07:08,339
So in that case, you're able to get better
returns on cash.
86
00:07:08,339 --> 00:07:13,620
You're actually better to borrow at the ten
year rate and invest in cash.
87
00:07:14,339 --> 00:07:17,379
And so sometimes you want to be actually short
bonds.
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00:07:17,725 --> 00:07:24,605
Sometimes the dividend yield on equity markets
are way below the dividend yield on ten year
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00:07:24,605 --> 00:07:26,285
treasuries or even on cash.
90
00:07:26,444 --> 00:07:33,245
And so you want to be short equities and long
cash or long treasury bonds.
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00:07:33,564 --> 00:07:39,060
And sometimes commodities have inverted curves
as well, which means that you get paid for
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00:07:39,060 --> 00:07:41,379
being short instead of being long, right?
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00:07:41,379 --> 00:07:47,935
So this is a long short portfolio that really
is just trying to position into markets to
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00:07:47,935 --> 00:07:54,654
maximize the absolute level of risk adjusted
carry, whether that carry is long or short.
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00:07:58,750 --> 00:08:03,870
Let's call it an uncorrelated strategy because,
you know, sometimes people perceive absolute
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00:08:03,870 --> 00:08:06,430
return as being very, very low risk.
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00:08:06,430 --> 00:08:11,629
You know, like you kind of expect that the,
portfolio is just gonna go up almost every
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00:08:11,629 --> 00:08:12,189
month, right?
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00:08:12,754 --> 00:08:18,435
Carry strategies, know, you can set them to any
sort of risk target you want.
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The diversification does an enormous amount of
work in order to manage that level of risk.
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00:08:25,120 --> 00:08:30,240
But you still definitely get a ride, right?
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00:08:30,240 --> 00:08:40,235
As you wait for markets to settle into and or
find equilibrium moving towards markets that
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00:08:40,235 --> 00:08:42,875
pay higher risk adjusted carry.
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00:08:43,035 --> 00:08:48,795
But markets move in the short term for a
variety of different reasons, and investors are
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00:08:48,795 --> 00:08:55,559
not always only concerned with seeking the
highest carry differential.
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00:08:55,559 --> 00:08:58,360
Sometimes they're fleeing risks.
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00:08:58,360 --> 00:09:04,404
Sometimes they're in high speculation mode and
they don't really care about what the yield is
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00:09:04,404 --> 00:09:10,245
because they think there's gonna be a buyer or
buyers who come in soon after and continue to
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push prices even further away from equilibrium.
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00:09:13,845 --> 00:09:19,740
There's a variety of different reasons that
markets can dislocate from the direction that
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you'd expect if carry was the only thing that
investors cared about all the time, but they
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00:09:26,540 --> 00:09:26,860
don't.
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00:09:26,860 --> 00:09:29,100
And therefore you absolutely do get these
fluctuations.
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00:09:33,365 --> 00:09:35,605
Investing in corporate bonds is a carry
strategy.
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00:09:35,605 --> 00:09:38,565
Investing in high yield bonds is a carry
strategy.
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00:09:38,565 --> 00:09:40,965
Investing in duration is a carry strategy.
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00:09:41,285 --> 00:09:45,550
Investing in dividend stocks is a carry
strategy, but they end up being these highly
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00:09:45,550 --> 00:09:48,670
concentrated portfolio bets, right?
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00:09:48,670 --> 00:09:55,309
So what we try to do is we say, well, we're
gonna use futures markets to invest in the
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00:09:55,309 --> 00:10:02,684
global equity indices with the highest risk
adjusted yields, the global government bond
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markets with the highest risk adjusted yields,
the global currencies with the highest risk
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00:10:06,924 --> 00:10:11,480
adjusted yields, and the global commodities
with the highest risk adjusted yields in the
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00:10:11,480 --> 00:10:14,279
direction that they are currently paying those
yields.
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00:10:14,360 --> 00:10:19,399
And as a result, because sometimes we're long
and short, different equity indices, long and
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00:10:19,399 --> 00:10:23,240
short, different government bond indices, long
and short, different currencies and long and
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00:10:23,240 --> 00:10:28,865
short, different commodities, it ends up having
a diversified global carry strategy, ends up
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00:10:28,865 --> 00:10:37,980
having a very uncorrelated return stream
relative to traditional allocations to equities
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00:10:37,980 --> 00:10:40,860
or bonds that most investors would have in the
portfolio.
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00:10:40,860 --> 00:10:46,300
To answer your initial question about how
accessible these strategies carry has
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00:10:46,300 --> 00:10:52,774
traditionally been, well, currency carry
strategy was traditionally an institutional
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00:10:53,815 --> 00:10:54,855
only strategy, right?
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That's in by pension funds, by hedge funds.
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Eventually many institutions brought that in
house.
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They made them a little bit more sophisticated.
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00:11:04,440 --> 00:11:10,440
So to this day, many institutions do run large
currency carry books.
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00:11:10,519 --> 00:11:15,159
Many institutions, though probably a much
smaller number, run diversified carry
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00:11:15,159 --> 00:11:16,040
strategies.
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00:11:16,200 --> 00:11:21,325
But it has traditionally been very difficult
for retail investors or smaller investors to
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00:11:21,325 --> 00:11:30,445
get access to the global carry style strategy
that, we offer in the return stack family.
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00:11:32,139 --> 00:11:38,060
But they could get some exposure to it by
investing in managed futures funds or managed
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00:11:38,060 --> 00:11:39,820
futures indices.
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00:11:40,139 --> 00:11:46,060
Typically, futures are known for their
deploying trend following strategies.
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00:11:46,595 --> 00:11:52,274
And it's still true to this day that the vast
majority of the returns to managed futures are
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00:11:52,274 --> 00:11:53,795
explained by trend following.
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00:11:54,115 --> 00:11:58,035
But what we've observed in our own research,
and there's been other studies that confirm
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00:11:58,035 --> 00:12:05,179
this, is that over time, many ministry
strategies have also begun to add in carry
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signals into their trend following strategies
because carry is a really nice natural
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diversifier to trend.
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00:12:12,620 --> 00:12:18,965
You know, trend typically tends to, chase into
the extremes of trends.
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And often at the extremes of trends, the carry
gets quite negative.
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00:12:23,605 --> 00:12:28,404
The market gets quite extended away from the
natural kind of economic equilibrium.
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00:12:28,899 --> 00:12:36,899
And so adding some carry to a trend strategy
can do a nice job of balancing out the most
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00:12:36,899 --> 00:12:38,500
extreme elements of trend.
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00:12:38,500 --> 00:12:44,245
And in fact, if you look over the very long
term, the diversified carry strategy and
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00:12:44,245 --> 00:12:47,764
diversified trend strategy end up having a
relatively low correlation in the neighborhood
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00:12:47,764 --> 00:12:49,285
of kind of 0.3, 0.4.
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00:12:49,285 --> 00:12:51,764
So there's just really nice compliments for one
another.
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00:12:56,309 --> 00:13:02,470
As an example, if you are an American investor
or Canadian investor and you invest in European
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00:13:02,470 --> 00:13:07,829
stocks and Euro cash rates are substantially
lower than Canadian cash rates.
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00:13:08,065 --> 00:13:15,504
Well, you implicitly are expecting a negative
carry on the currency even while you're
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investing in your European equities.
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00:13:18,065 --> 00:13:21,490
That's often an unintended bet, right?
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00:13:21,730 --> 00:13:28,289
If you own a carry strategy, then
definitionally, almost definitionally, are some
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00:13:28,289 --> 00:13:34,049
risk elements involved, but all things equal,
that carry strategy would do some of the work
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00:13:34,174 --> 00:13:41,214
in hedging the negative passive carry that that
investor would have in owning those foreign
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00:13:41,214 --> 00:13:46,975
stocks under that condition because the carry
strategy wouldn't actually be short the Euro
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00:13:46,975 --> 00:13:53,629
and long the Canadian dollar, for example, in
the example that I gave, right?
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00:13:53,870 --> 00:14:00,350
So it does sort of make explicit all of the
bets in the portfolio and make sure that you
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are properly positioned to harvest carry in the
right direction at the right time.
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You're making explicit, many bets that were
implicit, and you're managing them directly
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rather than unmanaging them.
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00:14:18,500 --> 00:14:27,779
I think a really, an easy example is think back
to 2022, obviously 2022, 2023, much of 2024, a
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really rough ride for bond investors because
even for corporate bond investors, think about
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the Bloomberg, Barclay aggregate index, the
corporate bond index, right?
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Well, has a duration of about eight, nine
years.
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And the, so you're getting compensated for both
a positively sloped interest rate curve and for
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00:14:54,289 --> 00:14:58,209
the credit risk that you're accepting for
investing in corporate bonds, right?
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00:14:58,754 --> 00:15:03,475
Well, that's nice most of the time, because
most of the time the interest rate curve is
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00:15:03,475 --> 00:15:08,195
positive and the credit yield is positive,
right?
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00:15:08,195 --> 00:15:13,154
But for 'twenty two, 'twenty three, and much of
2024, the interest rate curve was negative,
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00:15:13,315 --> 00:15:13,554
right?
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00:15:14,179 --> 00:15:20,419
So if you own a basket of corporate bonds, then
if you also want a carry strategy, what you
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00:15:20,419 --> 00:15:25,299
have is, in the bond portfolio, your long
credit risk and your long duration.
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In the carry strategy, your short duration,
right?
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Why?
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00:15:30,565 --> 00:15:33,845
Because you've actually got a negatively
sloping interest rate curve.
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00:15:34,004 --> 00:15:41,445
And so you've got negative carry on this
duration debt, right?
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00:15:41,684 --> 00:15:49,259
So in that way, you're sort of partially off
setting much of this negative carry exposure
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00:15:49,259 --> 00:15:55,500
that you have in your normal portfolio by
investing in this diversified carry strategy,
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00:15:55,659 --> 00:16:00,779
because it's just reducing the negative carry
on the duration element of your corporate bond
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portfolio.
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00:16:05,884 --> 00:16:09,164
There's obviously hedge funds that offer carry
strategies.
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00:16:09,164 --> 00:16:14,605
You can get a carry strategy if you're an
institution, you wanna sign an ISDA with a bank
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and get access to their QIS strategies.
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00:16:17,170 --> 00:16:19,090
Other than that, you're kind of out of luck.
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00:16:22,370 --> 00:16:25,330
We're just trying to democratize hedge fund
strategies.
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00:16:26,690 --> 00:16:28,450
Managed futures trend, same thing.
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00:16:28,450 --> 00:16:30,050
Historically, a two in 20 strategy.
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00:16:30,695 --> 00:16:34,855
The managed futures carry, historically a two
in 20 hedge fund strategy.
200
00:16:34,855 --> 00:16:41,735
And carry is an order of magnitude more
complicated from a data management architecture
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standpoint.
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00:16:42,455 --> 00:16:44,470
You've gotta get, it's not just prices, right?
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00:16:44,470 --> 00:16:47,350
For trend following, all you need is futures,
continuous futures prices.
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00:16:47,509 --> 00:16:53,990
For carry, you need to have the forward points
curve for currencies.
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00:16:53,990 --> 00:17:00,534
You've gotta have the cash curves for a variety
of different global government bond interest
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rate markets.
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00:17:01,335 --> 00:17:06,934
You've gotta have all the liquid contracts all
through the back end of the curve for all the
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00:17:06,934 --> 00:17:07,894
commodity contracts.
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00:17:08,410 --> 00:17:17,049
So like, it's a much more data heavy
architecture than most strategies.
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00:17:17,210 --> 00:17:21,210
And that might explain why it's not quite as
popular.
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00:17:21,210 --> 00:17:28,505
It takes a lot more work to build and deploy
and then generate daily signals for a carry
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strategy than it does for most other
strategies.
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So we had already done the work many years ago
for our hedge fund strategies.
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And we just took a component of that and made
it available at non hedge fund fees to any
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retail investor or advisor to add to their
portfolio.
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So we feel pretty good about that.
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00:17:54,154 --> 00:17:58,474
A big challenge over the last ten or fifteen
years is that global equity markets, for
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00:17:58,474 --> 00:17:59,914
example, have kind of gone straight up.
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00:17:59,914 --> 00:18:02,394
There've been a few blips over that period.
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But for the vast majority of the time, it's
been just a really nice tailwind for global
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equities.
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00:18:09,039 --> 00:18:13,599
And so investors year in, year out often
experience this regret.
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So while the advisor understands that it's
prudent to spread the investors' capital across
224
00:18:20,765 --> 00:18:27,164
a variety of different prospective sources of
return where they're not all expected to earn
225
00:18:27,164 --> 00:18:29,325
the returns at the same time for the same
reasons.
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That's why you diversify.
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00:18:31,565 --> 00:18:37,559
But the investor is left feeling every year,
well, I didn't quite do as well as my friends
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who maintain their concentrated position in the
global equity markets.
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So there's this regret that builds up over
time.
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00:18:45,640 --> 00:18:51,865
So any attempt to kind of sell down your
equities in order to make room for a
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00:18:51,865 --> 00:18:56,345
diversifier ends up being egg on the advisor's
face.
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So what return stacking acknowledges is that
investors typically don't want to sell down
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their beloved equity and bond allocations.
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When they go to dinner parties, they don't want
to feel like they're underperforming their
235
00:19:09,960 --> 00:19:12,519
neighbors or their friends or their family,
right?
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00:19:12,679 --> 00:19:19,974
So we don't want to force them to reduce the
things that they know and love in order to take
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00:19:19,974 --> 00:19:22,934
the healthy medicine of diversification.
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00:19:23,494 --> 00:19:31,734
So return stacking builds portfolios that give
you back the full exposure to the underlying
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00:19:33,500 --> 00:19:43,180
equity or bond index that clients wanna keep,
and stack a completely diversified strategy on
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top, right?
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00:19:43,820 --> 00:19:49,914
So stack a managed futures trend following
strategy, stack a managed carry strategy, stack
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00:19:49,914 --> 00:19:55,994
a merger arbitrage strategy, soon stack gold
and Bitcoin, for example.
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Just things that move to a different drummer
for different reasons at different times, stack
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00:20:01,220 --> 00:20:08,099
it on top so that the client doesn't need to
give up the returns and the experience that
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00:20:08,099 --> 00:20:13,700
they want capturing the growth of their core
assets.
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00:20:14,664 --> 00:20:19,704
But they do get the advantage of the
diversification during those inevitable
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periods, which historically have often lasted
many years, often a decade or more at a time
248
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where equities have underperformed cash with a
very painful ride along the way.
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Well, then they're very happy to have this
added exposure on top that in many cases
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00:20:42,205 --> 00:20:48,365
historically has gone on to do just exceedingly
well precisely during those periods when the
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core markets struggle.
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00:20:54,140 --> 00:21:02,140
At the moment, investors are making decisions
that are not really guided by their short term
253
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economic self interest, but rather are guided
by other motivations, either geopolitics or
254
00:21:08,380 --> 00:21:09,019
what have you.
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00:21:10,134 --> 00:21:17,894
And what that means is that in some cases, the
markets have become quite dislocated from their
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00:21:17,894 --> 00:21:19,494
economic equilibrium.
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00:21:19,734 --> 00:21:24,295
And we like to think of that as potential
energy in the portfolio, right?
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Like the investors in the carry strategy over
the last year have spent a lot of energy
259
00:21:30,299 --> 00:21:33,339
rolling the boulder up the hill, right?
260
00:21:33,500 --> 00:21:39,820
And at some point then the conditions will
change and that boulder will roll back down the
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00:21:39,820 --> 00:21:40,059
hill.
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00:21:40,434 --> 00:21:46,994
Historically, we see that after periods of
like, you know, a year or two of struggle, that
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00:21:46,994 --> 00:21:52,434
the carrier strategies do go on to produce some
of their best returns over the near term,
264
00:21:52,434 --> 00:21:52,755
right?
265
00:21:52,755 --> 00:21:59,539
So, you know, it could be, quite a prospective
time to start allocating to carry strategies.
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00:21:59,859 --> 00:22:06,904
It may not look as attractive, over the last
year or so, if you look at the chart, but
267
00:22:06,904 --> 00:22:11,464
that's, you know, carry is one of these
strategies that can build this potential
268
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energy.
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00:22:11,944 --> 00:22:13,704
It's just like a value portfolio.
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When it goes down, the companies that just get
cheaper and more attractive, right?
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00:22:17,944 --> 00:22:20,265
Well, carry has this same kind of quality to
it.
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00:22:20,519 --> 00:22:26,119
And in many ways, the carry portfolio of today
is more attractive with potentially higher
273
00:22:26,119 --> 00:22:32,279
expected returns over the next year or two
because of it than, you know, when we launched
274
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a year or so ago.
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So there's something for investors to think
about.
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Yeah, I think that's one of the greatest
benefits of the Returns Stacked suite is that
277
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the diversification is kind of cloaked by the
underlying exposure to the core asset class,
278
00:22:55,390 --> 00:22:55,710
right?
279
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And stocks or bonds.
280
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And so it's harder for investors to kind of
agitate or get grumpy because if the core asset
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00:23:05,775 --> 00:23:14,575
class has had a nice rise, in all likelihood,
the carry plus that asset class portfolio has
282
00:23:14,575 --> 00:23:16,255
also experienced a rise.
283
00:23:16,255 --> 00:23:22,320
And even if the carry has had a negative
return, it's just kind of attenuated that
284
00:23:22,320 --> 00:23:27,839
positive return on the underlying core
allocation rather than looking like a line item
285
00:23:27,839 --> 00:23:29,919
on the portfolio with a negative return.
286
00:23:29,920 --> 00:23:34,244
And from an emotional standpoint, that could be
a world of difference in conversations with
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00:23:34,244 --> 00:23:40,484
clients and their motivation, incentive, and
sustainability in sticking with it.
288
00:23:44,529 --> 00:23:50,609
We can judge that by historical simulations,
which have been very strong.
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00:23:50,849 --> 00:23:58,065
But in general, I think it's healthy from an
expectation standpoint for investors to kind of
290
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think about these diversifiers as having the
same approximate long term expected return per
291
00:24:07,105 --> 00:24:16,070
unit of risk as equities or bonds or other
types of risk premia or strategies that they
292
00:24:16,070 --> 00:24:18,470
might think about allocating to, right?
293
00:24:18,470 --> 00:24:26,914
So the long term excess risk adjusted return
for global equities is in the neighborhood of
294
00:24:26,914 --> 00:24:29,554
0.35 to 0.4.
295
00:24:29,714 --> 00:24:31,714
It's about the same for bonds.
296
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I think we could probably say the same thing
for a managed futures trend, or a managed
297
00:24:37,554 --> 00:24:43,960
futures carry, or merger arbitrage strategy,
which are some of the other strategies that we
298
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are stacking.
299
00:24:47,079 --> 00:24:50,440
So we run the carry strategy at about a 10%
volatility.
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00:24:50,680 --> 00:24:57,904
So we might expect a three to 5% excess return
over the long term from an allocation to carry,
301
00:24:57,904 --> 00:25:03,984
just as we would expect similar returns at that
same volatility for an allocation, a stack to
302
00:25:03,984 --> 00:25:06,785
trend or a stack to merger arbitrage.
303
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So an extra 0.3 to 0.5% a year on average long
term at a 10% allocation.
304
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The track record on stock picking is not very
good, right?
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If you look at the SPIVA annual reports,
typically somewhere between 7095% of active
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managers underperform.
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And the managers that have outperformed over
the past one, three, five, ten years actually
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typically go on to underperform over the next
three to five years.
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So it was just very difficult to find active
managers like that are stock pickers or bond
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pickers that have a high likelihood of
outperforming.
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So, you know, these are just uncorrelated
strategies that are in the macro space, they're
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not nearly as picked over.
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I like to say 99% of all cognitive and
computational resources in markets go towards
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choosing the best stocks or choosing the best
bonds.
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And there's almost no effort or resources
allocated to how much WTI crude oil should I
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own relative to Brent crude oil or German bonds
or US equities The US equities versus the
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Nikkei.
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So this is just not nearly as picked over.
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There used to be a rule called Samuelson's law
that says that the market is micro efficient,
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but macro inefficient.
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Micro being picking stocks within the stock
market, macro being picking which stock market,
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which bond market to own, or how much to own in
stocks or bonds or commodities or gold or
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currencies, etcetera, right?
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So we believe that this is a much less
efficient space to seek these excess returns
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in, like the returns are likely to be stronger
over time for each unit of risk and more
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sustainable, just because there are regulatory
and institutional frictions to the deployment
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of a massive amount of capital there.
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So we think it's a really good opportunity for
retail investors.
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It has very low average long term correlation
to the types of things that retail investors
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typically invest in.
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And it's just not offered anywhere else to
retail investors in this form.
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And the structure of being able to get access
to this diversification without having to give
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up the core stock and bond exposure that people
have grown to really love, I think is the gift
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that keeps on giving.
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The primary educational portal for return
stacking is returnstacked.com.
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That's stacked.com.
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There's also returnstackedetfs.com.
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And there's plenty of research on managed
futures, diversification, and carry itself,
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including a white paper and a long detailed
blog post on investorsall.com, on our blog.
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So there's lots of videos on Resolve's YouTube
channel, on the Returnstack YouTube channel.
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So, you know, we're doing our best to try to
cover the waterfront in terms of educational
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material for Carrie.
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And if anyone has any questions or follow-up,
then we would welcome direct questions to me at
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adam.
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Butlerinvestresolved dot com.
