Return Stacking

[Andrew Stepner]

I am undertaking a massive project to implement the relatively recent concept being marketed as Return Stacking.

Premise:

1) Diversification to reduce risk

+

2) Leverage (good if used right)

=

Higher returns for the same amount of risk

(or alternatively, it can be lower risk for the same amount of return)

Related examples:

Warren Buffett's track record using float and home mortgages (natural 5X leverage). Therefore leverage shouldn't be a dirty word. When used appropriately (such as to diversify) it can be vital to outperformance.

$NSTX:

The $NTSX ETF by WisdomTree is a good example where they take a classic 60/40 Stocks/Bonds portfolio, lever it up 50% to 90/60 and end up with a superior risk/reward profile than just holding equities.

I'm going to replicate this strategy:

Since I have individual stocks that I don't want to sell, I am going to create the leverage strategy myself using Futures (which is what they use). I will be diverisfying beyond bonds to other securities that have low correlation to stocks. Biggest ones being Managed Futures (~trend following in commodities, etc) and the $BTAL market neutral ETF. It is sort of a "Portable Alpha" concept. The devil is in the details.

I mentioned the topic to Brendan and he seemingly has only minor interest. Do you all have any interest or is it just me? Huge topic that I am deep diving, so I am happy to delve into any area of it.

Stepner