Nov 12, 2026 · 1h 1m
Return stacking challenges the stock-bond diversification default
Stock Investors Fear an AI Bubble. Bond Investors Fear Inflation. How Can You Diversify Without Selling Them?
When inflation can push stocks and bonds lower together, investors need diversification that survives both market shocks and client impatience.
- 1Inflation can weaken bonds’ traditional hedge against equities, leaving portfolios exposed when both asset classes fall together.
- 2Return stacking preserves core stock and bond exposure while adding diversifiers such as managed futures through capital-efficient structures.
- 3Diversification only works if investors can tolerate tracking error, drawdowns, leverage, liquidity constraints, and imperfect correlations.
Don't miss
The guests explain why investors may abandon a diversifier during underperformance, making behavioral durability as important as statistical correlation.
The brief
Corey Hoffstein and Adam Butler begin with lessons from Cliff Asness on the emotional cost of real-world diversification, especially when drawdowns test clients’ conviction.
The stock-bond mix can fail during inflationary shocks: bonds may lose their growth-hedging role just as concentrated equities face valuation and AI-bubble concerns.
Return stacking offers a capital-efficient alternative to an either-or allocation, keeping core holdings while adding managed futures or other genuinely diversifying exposures.
The guests stress that zero correlation is not a promise of gains during every crisis; leverage, collateral, liquidity, implementation, and tracking error still matter.
The standout lesson is behavioral: investors often abandon alternatives during underperformance, so a diversifier must be structurally and psychologically sustainable.
What was said on this episode
17 statements · 16 positive · 1 negative
- Corey Hoffsteinon Return stackingPositive21:09
Return stacking can provide core stocks or bonds plus an additional diversifier for each invested dollar.
“Return stacking allows us to say, What if we had a vehicle that for every dollar you invest, you're going to get a dollar of core stocks or bonds plus a dollar of a diversifier on top.”
Listen at 21:09
Return stacking can replace core equity exposure while adding an equal alternative allocation.
“return stacking allows you to, say, sell 10% of your core equity mutual fund or ETF by 10% of a return stacked. core equity ETF with a dollar of alternative stacked on top.”
Listen at 24:25
“many of those hedge funds also gated. And so they weren't able to source capital from the hedge funds either.”
Listen at 39:01
Portable alpha re-emerged among institutional investors in the late 2010s.
“Portable Alpha has kind of re-emerged in the institutional space in the late teens.”
Listen at 40:06
A return-stacked portfolio can shift capital from managed futures to equities during equity drawdowns.
“we can lower the risk budget of the managed futures stack to provide more capital to the equity stack.”
Listen at 40:45
Equity and managed-futures components are liquid and structurally uncorrelated.
“both sides of the trade are liquid and structurally, both sides of the trade are uncorrelated.”
Listen at 41:05
Liquidity enables selling one component high to fund buying another component low.
“So you're able to sell one at a higher level to fund the purchase of another at the lower level and let rebalancing work its magic.”
Listen at 41:41
- Corey Hoffsteinon Turnkey cash-plus structuresPositive43:29
Turnkey cash-plus structures make joint rebalancing easier and reduce 2008-style structural risk.
“It's much easier to then rebalance those things together. And you don't run the same structural risk that was happening in 2008.”
Listen at 43:29
- Corey Hoffsteinon Turnkey structuresPositive44:11
Turnkey structures are better from a risk perspective than separate beta and alpha arrangements.
“it's much better from a risk perspective.”
Listen at 44:11
- Corey Hoffsteinon Managed futuresPositive45:03
Managed futures is likely the most demanded and easiest alternative strategy for these advisors to underwrite.
“managed futures is probably the strategy that is most in demand from the advisors we work with and probably the easiest for them to underwrite.”
Listen at 45:03
- Corey Hoffsteinon S&P 500 futuresPositive45:51
“I only need to put like $5 up.”
Listen at 45:51
- Corey Hoffsteinon Managed futuresPositive46:39
Managed futures has historically generated positive excess returns and been uncorrelated with stocks and bonds.
“managed futures has this history empirically of generating positive excess returns, being uncorrelated from stocks and bonds.”
Listen at 46:39
- Corey Hoffsteinon Managed futuresPositive46:46
Managed futures has historically delivered crisis alpha during economic and inflationary stress.
“It's historically delivered crisis alpha in both periods of significant economic stress, as well as inflationary stress.”
Listen at 46:46
Managed futures has live performance history predating the first retail equity index mutual fund by 27 years.
“this is a strategy that where we have funds and managers with live returns going back to Richard Dodd chain launched Futures Inc. 27 years before Bogle launched the first. equity index mutual fund available for retail investors”
Listen at 47:09
Managed-futures trend indices and funds now manage hundreds of billions of dollars.
“now managing a few hundred billion dollars. that go back to the late 80s.”
Listen at 47:52
Managed futures has historically been a strong but imperfect equity diversifier during crises.
“historically has acted as a really strong, if not 100% reliable, diversifier to equities during crisis periods.”
Listen at 49:33
“in the two beer markets that I mentioned, actually there were quite strong positive returns.”
Listen at 50:08
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
Weekly email
State of the Pod, every Monday
The week's most-discussed names and stories from podcasts, with the moments behind them. Free, five minutes, unsubscribe in one click.