Return Stacked® Portfolio Solutions

Diversification Without Sacrifice

Return stacking strives to unlock the benefits of diversification, helping investors achieve their goals with greater certainty.

The Math is Clear...

It is said that the only free lunch in investing is diversification.  By combining uncorrelated investments, wealth compounds more consistently and investors can achieve their financial plans with greater certainty.

Why, then, do so many investors forgo diversifying alternative investments within their portfolios?

Plots the expected return of hypothetical portfolios with an increasing number of diversifying assets, demonstrating a consistent reduction of volatility in terminal wealth dispersion.

"If diversification is so good, why don't more investors add alternatives to their portfolio?"

Ask enough investors and an answer becomes clear: it is not just a question about adding things to a portfolio, but also one of subtracting. 

To make room for an alternative investment strategy in their portfolio, you typically have to sell some of your core stocks and bonds.  This can lead to a significant performance drag when alternatives underperform these core assets.

But what if you didn’t have to sell core stocks and bonds?  What if you could stack the alternative investment on top?

Introducing Return Stacking

At its core, return stacking is the idea of layering one investment return on top of another, achieving more than $1.00 of exposure for each $1.00 invested.

By wrapping this concept into professionally managed mutual funds and exchange-traded funds, we seek to provide investors with the building blocks to unlock the benefits of diversification in their own portfolios.

An animation visually demonstrating how return stacking can layer new exposures on top of an existing portfolio.

Making Diversification Sustainable

Selling stocks or bonds to make room for alternatives can lead to performance drag when those alternatives underperform.

Return stacking allows you to maintain your core portfolio assets and introduce a strategic allocation to alternatives for the inevitable periods when the core assets struggle.

Read the original Return Stacking whitepaper here.

An Old Idea Reborn

In the 1980s, the Pacific Investment Management Company (PIMCO) launched their StocksPLUS series of strategies.  The idea was simple, but powerful.  Rather than search for alpha in large-cap equities, where competition was fierce, they would buy passive equity exposure and look for alpha in short-term, high quality bonds.

To make this idea work, PIMCO would gain its equity exposure through capital efficient derivatives such as futures and swaps.  This meant they only had to outlay a fraction of their capital to achieve the passive equity exposure, leaving the remainder of the capital available for investing in bonds!

Mechanics of a portable alpha implementation
Mechanics of a portable alpha implementation demonstrating how passive beta is replaced with capital efficient derivatives, freeing up valuable capital for investing in alpha strategies.

For illustrative purposes only.

Over time, investors realized that this design allowed investors to separate beta from alpha.  By implementing beta through capital efficient derivatives, valuable capital can be unlocked and reinvested in potentially diversifying alternative return streams.

This concept became known as portable alpha.

Portable Alpha for Everyone

For decades, sophisticated institutional investors have used portable alpha to include diversifying alternative strategies without diluting their core stock and bond allocations. Due to the complexity of managing derivatives, small institutions, financial advisors, and individuals have largely been locked out of this approach.

Today, professionally managed mutual fund and exchange-traded products allow investors to implement this concept.

At Return Stacked® Portfolio Solutions, we are developing the research, product design, and portfolio construction that unlocks this opportunity for everyone.

Making Room in a Portfolio

Assume you held a 50% stock / 50% bond portfolio.  You could replace your holdings with a fund that provides the same exposure with 1.5x leverage (a “75/75” fund).  By allocating 2/3rds of your portfolio to such a fund, you create a capital efficient implementation that frees up 1/3rd of the portfolio for a variety of potential uses.

For example, similar to PIMCO’s StocksPLUS program, the available capital could be allocated to low-duration, high quality bonds.  It might also be allocated to alternative assets and strategies that have the potential to introduce beneficial diversification to the portfolio.  You could also choose to leave some, or all, of it in cash to help better manage cash-flow needs (e.g. withdrawals or capital calls) without sacrificing core stock and bond exposure.

Packaging portable alpha into a fund structure can allow investors to free up room in their portfolio
An example of implementing return stacking to free up room in a portfolio

Explicitly Stacking Alternatives

Funds implementing return stacking may combine a variety of betas (e.g., stocks and bonds), non-traditional betas (e.g., commodities), and alternative investment strategies in a variety of leverage targets to provide capital efficient exposure for investors.

As an example, consider a fund that seeks to provide $1 of exposure to bonds and $1 of exposure to alternatives for every $1 invested.  If you wanted to stack the alternative strategy on top of your existing portfolio, you could simply sell some of your bonds and buy the fund.

Packaging portable alpha into a fund structure can allow investors to explicitly stack alternatives on their portfolio
An example of return stacking where alternatives are embedded in a return stacked fund.

Why Return Stacking?

Pursuing Diversification without Sacrifice

Investors can introduce diversifying assets and strategies without sacrificing exposure to their traditional asset allocation.

Opportunity for Enhanced Returns

By introducing additional sources of return, Return Stacking creates the potential for outperformance, which may be particularly attractive in an environment where expected returns for traditional assets may be muted.

Potential to Improve Diversification

By thoughtfully introducing differentiated return streams, investors may gain a diversification advantage with the potential to reduce portfolio volatility and drawdowns.

Managing Investor (Mis-)Behavior

Alternative investments can be difficult to stick with, particularly when they underperform traditional assets for years on end (often with higher costs, less tax efficiency, and less transparency).

Historically, to make room for alternatives in your portfolio, you would have to sell core stock and bond exposure.  The choice to add alternatives is also a choice to subtract stocks and bonds.  This has the potential of creating meaningful underperformance during strong bull markets.

With return stacking, you have the potential to maintain your core stock and bond exposure, reducing tracking error to your benchmark.

In the figure below, we assume an investor has a 60% S&P 500 / 40% Bloomberg Core US Bond benchmark.  In the first case, they allocate 33% of their portfolio to managed futures by selling stocks and bonds equally.  In the second case, they stack the returns on top.  The figure plots the relative drawdown of these portfolios versus the benchmark, showing the periods when they would have underperformed, how much they would have underperformed by, and for how long.

Relative drawdowns versus a 60/40 of two different methods of including alternatives in a portfolio
Plots the relative drawdown versus a 60/40 benchmark of two. portfolios – one that implements return stacking and one that does not.
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