Episode 15: Newfound’s Corey Hoffstein

Style Factors and Investment Risk

Corey Hoffstein is the co-founder and Chief Investment Officer at Newfound Research, as well as an ETF Strategist. Hoffstein and his colleagues have produced some of the more innovative research papers in recent years, venturing into debates such as using style factors at a sector level, combining leverage and trend-following to reduce the scope of drawdowns and admitting that investing will often be frustrating and always risky. Hoffstein’s motto therefore is: ‘Risk cannot be destroyed, it can only be transformed’

Podcast advert

Corey Hoffstein podcast overview:

1:45 Mount Rushmore of Quants: Would you put Asness and Arnott together?
5:30 I thought that I would make a living programming computer games.
7:30 Father’s financial planner introduced Corey to financial data.
9:00 First journey into quant data methods: rediscovering value and quality
12:30 Pointing fingers at each other for who is responsible for risk
14:00 But it is not simply about passing the risk buck.
16:30 Catastrophe is the result of tiny mistakes compounding
19:30 For us risk management is the mitigation of drawdown
20:00 Most financial plans don’t assume to outperform the market. Alpha is the gravy on top
22:00 Style-factors can be used at the sector level as well to manage risk
23:00 Is momentum market timing?
25:30 Risk cannot be destroyed, it can only be transformed
26:00 Trend-following can really help you cut out those really nasty left tails
30:00 When the market whipsaws, you pay a very high premium for trend-following
34:00 Application of trend-following in retirement portfolios
36:00 Review of the 4% rule in retirement planning
37:30 But at today’s yields, if you use the 4% rule your risk suddenly skyrockets
38:00 Retirees today will have to allocate to asset with which they feel uncomfortable
40:00 Weaknesses of a quant approach: where are you embedding your biases?
49:00 To proof that a risk premium has disappeared might take longer than the lifetime of a typical investor.
50:00 Similarly, if a factor doesn’t work for 10 years that doesn’t mean it has disappeared
57:00 Looking in a rearview mirror, diversification is always going to disappoint. But without a crystal ball, we don’t know which approach is going to outperform.
58:00 Dealing with concentrated markets.
1:03:00 Investing is like cooking; ingredients are important, but so is the recipe. In asset management we focus too much on the ingredients.
1:04:30 Are smart beta strategies becoming too crowded and get arbitraged away?
1:09:00 A real anomaly must by definition be hard to follow. If it was easy, everyone would do it.
1:10:30 It also means that an active strategy that works, must have its days of underperformance
1:11:00 If you are going to have an active approach, you should be prepared for a frustrating experience
1:13:00 Can we time factors? Well maybe, but it is just going to compound frustration. It is better to take a few approach that you understand and belief in and then diversify
1:16:00 A mandate to a manager should be an allocation, not a trade
1:17:00 We spend a lot of time talking about alpha, but for most people alpha is not part of their retirement plan
1:19:00 There are certain strategies that benefit from a human touch, because there are too many degrees of freedom for a computer to deal with.
1:21:00 Taking a ‘quantamental’ approach

About the [i3] Podcast

The [i3] Podcast is a conversation with some of the leading institutional investors around the world, discussing their philosophy towards investing, in particular towards portfolio construction and investment strategy. The [i3] podcast is available on iTunes, Google Podcast, Spotify, Stitcher or your favourite podcast platform.