Why Beating the Market Isn’t Enough for Investment Managers | Corey Hoffstein
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode of Other People's Money, Corey Hoffstein, CEO and CIO of Newfound Research and co-founder of Return Stacked ETFs, shares his journey from licensing quantitative research to building a successful asset management business. The discussion explores how quantitative strategies differ from systematic investing, the challenges of market timing versus high-breadth strategies, and the evolution of risk premia over time. (30:00) Hoffstein emphasizes that successful asset management requires solving client problems beyond just beating the market, particularly focusing on behavioral finance challenges and distribution strategies. The conversation delves into the transition from research licensing to direct asset management, the importance of content creation for brand building, and how to properly evaluate quantitative research as a non-expert.
- Main Theme: The evolution from investment research to asset management, emphasizing that successful products must solve client problems beyond market outperformance, with distribution strategy being equally important as investment strategy.
Speakers
Corey Hoffstein
Corey Hoffstein is the CEO and CIO of Newfound Research and co-founder and portfolio manager of Return Stacked ETFs. He holds a master's degree in computational finance and founded his company in 2008 as an IP holding company that licensed quantitative investment models to other asset managers. Over his 15+ year career, he has evolved from licensing research and building indexes to launching mutual funds and eventually ETFs focused on "return stacking" strategies that bring institutional portable alpha concepts to individual investors.
Max Wiethe
Max Wiethe is the host of Other People's Money podcast, which focuses on the business of investment management. He brings expertise in interviewing investment professionals and exploring the operational and strategic aspects of running asset management businesses.
Key Takeaways
Successful Asset Management Requires More Than Investment Performance
Hoffstein emphasizes that building a sustainable asset management business requires solving problems beyond just beating the market. (44:44) He argues that "beating the market" has become a commoditized value proposition, and successful products must address behavioral finance issues, operational challenges, and client sustainability concerns. For example, their return stacking products solve the problem of helping advisors introduce diversifying alternatives without creating behavioral friction with clients who might abandon strategies during underperformance periods.
Distribution Strategy Is As Important As Investment Strategy
A critical lesson from Hoffstein's experience is that distribution strategy must align with investment strategy for success. (41:55) He notes that many portfolio managers fail when launching products because they focus solely on investment management rather than asset management business building. The product wrapper (ETF vs. mutual fund vs. private vehicle) must align with both the strategy's requirements and the target distribution channel's preferences and regulatory constraints.
Breadth Determines Strategy Credibility
When evaluating quantitative strategies, Hoffstein prioritizes breadth - the number of independent bets - as the key indicator of whether outperformance represents skill versus luck. (05:39) Low-breadth strategies like market timing, which might only provide a handful of decisions over an investment career, make it nearly impossible to prove statistical significance. High-breadth strategies with dozens or hundreds of independent decisions across time provide more reliable evidence of genuine edge.
Content Creation Serves Multiple Business Functions
Hoffstein views content creation as serving both top-of-funnel brand awareness and bottom-of-funnel sales support. (55:49) While podcasts and viral research papers build general brand recognition, the most effective content addresses specific questions raised by the sales team, creating a comprehensive library that helps move prospects through the conversion funnel and retain existing clients by demonstrating ongoing thought leadership.
Risk Premia vs. Anomalies Require Different Approaches
Hoffstein distinguishes between persistent risk premia (like merger arbitrage) where the risk is clearly identifiable and compensated, versus market anomalies (like momentum) that rely more on behavioral explanations. (10:14) Risk premia strategies have fundamental economic reasons for existing, while anomalies are "more faith-based" and require constant reassessment as market structure evolves. This distinction is crucial for understanding which strategies are likely to persist over time.
Statistics & Facts
- When Hoffstein started in the early 2010s, ETF strategists could charge 80-100 basis points for actively managed model portfolios, but these fees came down dramatically when BlackRock and State Street entered the space around 2013 and offered models for free. (25:23)
- Hoffstein's firm went from nearly zero to almost a billion dollars in assets under management after a client committed marketing fraud, but then lost $750 million with a single phone call when Goldman Sachs acquired a major client and fired all external managers. (39:00)
- A liquidity cascades research paper Hoffstein published went viral in the finance world, getting downloaded 35,000-40,000 times, demonstrating the potential reach of educational content in building brand awareness. (59:49)
