Liquidity Cascades: The Culmination of Suppressed Rates, Passive Mandates, & Excessive Risk Taking

Published on
February 19th, 2021
80 minutes

Memories of 1987: Felix Zulauf’s Outlook on Equities, Bonds, Currencies, and Commodities

Liquidity Cascades: The Culmination of Suppressed Rates, Passive Mandates, & Excessive Risk Taking

The Interview ·
Featuring Corey Hoffstein and Jason Buck

Published on: February 19th, 2021 • Duration: 80 minutes

Jason Buck of the Mutiny Fund welcomes Corey Hoffstein, co-founder and chief investment officer of Newfound Research, for an in-depth investigation into the pivotal forces that are shaping markets. Hoffstein argues that rate suppression via the Federal Reserve has forced active investors out on the risk curve in order to beat their benchmarks. Meanwhile, the rise of passive investment vehicles, which as Hoffstein writes “know the price of everything but the value of nothing,” create severe market distortions, which heighten volatility. This insufficient liquidity is exacerbated, Hoffstein continues, by the convex hedging pressures of market makers in the options market who buy as the underlying stock goes up and sell as it goes down. The confluence of these factors create phenomena that Hoffstein calls “liquidity cascades,” or rapid melt-up and melt-downs. For Hoffstein’s report, “Liquidity Cascades: The Coordinated Risk of Uncoordinated Market Participants,” click here: Filmed on February 17, 2021.

Key learnings:
Hoffstein argues that a portfolio consisting of out-of-the-money puts and calls, combined with an equity portfolio consisting of trend, momentum, and quality factors, is best prepared to handle a market landscape with frequent liquidity cascades. Hoffstein calls this portfolio “The Daedalus Portfolio.”



  • AC
    Alvaro C.
    24 February 2021 @ 23:50
    Great discussion, well done again RV. On the increased volatility in markets: Is there any research on the impact of (abnormally) low interest rates on these "reflexive and volatile cocktails"? My hypothesis is that these issues are pro-cyclically supercharged by low interest rates, thus the appropriate answer is not to "regulate them away" but [perhaps wishful thinking] to allow interest rates to do their countercyclical work. Thoughts?
    • JB
      Jason B. | Contributor
      26 February 2021 @ 14:09
      That is the essence of Austrian economics, but we have had market volatility at “high” rates as well.
  • DG
    David G.
    25 February 2021 @ 07:52
    Thank you for going into the more detail about your Icarus analogy that you also mentioned during the Aftermath conference. Also, I keep hearing a lot of smart people reference either writing, or reading white papers. Where you go to find the best white papers? I don't want the seeking alpha version of white papers, in which everyone is basically submitting content every 20 secs, and I have to sift through a lot of content, to find the gems. Is there a great place either of you like, for the best of the best white papers? Thanks.
    • JB
      Jason B. | Contributor
      26 February 2021 @ 14:07
      David, that’s a great question, I wish there was a place, the best papers seem to bubble up, probably FinTwit is the best space....I smell an aggregator opportunity!
  • DG
    David G.
    25 February 2021 @ 08:06
  • MH
    Mark H.
    21 February 2021 @ 19:45
    I wish RV would have a video where these guys and everyone else that makes sense explains how we ended up at a zero risk-free rate and what are the consequences. When I watch this, it seems like the only people that are going to be able to cope with it are the ones that can hire guys like this. Really excellent interview.
    • AC
      Alvaro C.
      24 February 2021 @ 23:51
      See my comment above. On the increased volatility in markets: Is there any research on the impact of (abnormally) low interest rates on these "reflexive and volatile cocktails"? My hypothesis is that these issues are pro-cyclically supercharged by low interest rates, thus the appropriate answer is not to "regulate them away" but [perhaps wishful thinking] to allow interest rates to do their countercyclical work. Thoughts?
  • MK
    Martin K.
    22 February 2021 @ 06:40
    Jason looks like David Beckham.
    • JB
      Jason B. | Contributor
      23 February 2021 @ 00:29
  • MB
    Mark B.
    21 February 2021 @ 13:58
    Incredible enlightenment so carefully explained and validated that was given the complexity of the subject matter was so "relatively" easy to engage with, understand and most importantly derive meaningful and tangible benefit from. Thany you both, the skills and knowledge of both interviewer and interviewee greatly increased the value to a numpty like me!
    • JB
      Jason B. | Contributor
      22 February 2021 @ 13:29
      Thanks Mark, Corey’s ability to breakdown a subject are bar none.
  • JC
    Jim C.
    21 February 2021 @ 12:59
    Strong show from both Jason and Corey. Anyone who hasn't read Liquidity Cascades should do so immediately.
    • JB
      Jason B. | Contributor
      22 February 2021 @ 13:26
      Thanks Jim!
  • DP
    Divyesh P.
    22 February 2021 @ 12:51
    Very Good.
  • MH
    Michael H.
    21 February 2021 @ 21:40
    A great interview. Corey is obviously very intelligent, yet understands there is much he isn't sure of. Do any of us? Be wary of anyone that is very sure about the future.
  • DD
    Dmitry D.
    21 February 2021 @ 15:35
    Somewhat overdue for RV, given the importance and the quality of the paper (as well as Corey generally, what an awesome guy), but better late than never. This interview is as seminal as the paper itself, just amazing.
  • KP
    Kay P.
    21 February 2021 @ 12:27
    Excellent Interveiw -Corey is very insightful and clearly thinking of the whole picture with a constructive thought process edge. One of the best interviews I've heard for awhile - left me wanting to listen to it again which I will do. BRAVO! Can we have him back on soon - please RV!
    • CH
      Corey H.
      21 February 2021 @ 13:41
      Thank you for the very kind words, Kay!
  • TS
    Tom S.
    21 February 2021 @ 04:51
    social media + robinhood access = interesting cocktail indeed
  • FL
    Frank L.
    21 February 2021 @ 03:05
    Excellent discussion. I look forward to reading your paper(s). It seems difficult to overstate the importance of market structure to investing in public mkts today.
  • NC
    N C.
    21 February 2021 @ 01:49
    Just read a comment below. RV, please add Tim Lee of pi Economics to the list of future guests.
  • NC
    N C.
    21 February 2021 @ 01:41
    Thank you, Corey, for sharing your knowledge and research. And Jason for conducting an excellent interview.
  • pl
    peter l.
    21 February 2021 @ 00:24
    Incredible. Had to watch several times to absorb things. Bring Corey back next quarter PLEASE!!!
  • GA
    Gabriel A.
    20 February 2021 @ 23:36
    Wow, I barely understood a 1/4 of what they said! Deep Value for the $ LMAO!
  • NF
    Neal F.
    19 February 2021 @ 13:20
    Nice interview for RV. For those not aware Corey runs an outstanding podcast, Flirting With Models, that focuses on quant finance (machine learning, factors, vol, etc.)
    • CH
      Corey H.
      20 February 2021 @ 23:24
      I get very lucky to have such outstanding guests come on!
  • DN
    Douglas N.
    19 February 2021 @ 13:06
    Have the interviewee figure out how Mark Spitznagel's fund made 4400% in March sell off
    • JB
      Jason B. | Contributor
      19 February 2021 @ 13:46
      He made 12.8% to offset a -12.4% S&P for a net return of 0.4%. The salacious headlines are solely due to the premium spent on a short window of options without context.
    • JF
      Jack F. | Real Vision
      19 February 2021 @ 16:39
      Damn Jason, you really know your stuff!
    • KZ
      Konrad Z.
      20 February 2021 @ 12:58
      @Jason but as far as I understand if someone sold the units in that fund in march, the net result would be 4400%? since they claim "The fund, managed by Universa Investments of Miami, had a year-to-date return of 4,144% through the end of last month, according to an investor letter from President and Chief Investment Officer Mark Spitznagel that was obtained by Bloomberg"
    • JB
      Jason B. | Contributor
      20 February 2021 @ 22:16
      Konrad, it’s in the same article, they spend a total of 3.3% a year on premium for a 100% notional beta exposure. I know other who were up the same 3000-5000% on premium spent. If you use that metric then you also have to say they lost -100% every month/quarter. Universa did a great job for their clients...
  • AC
    Aaruran C.
    20 February 2021 @ 08:25
    Mike Green needs to watch out... Jason Buck coming for the RV throne
    • JB
      Jason B. | Contributor
      20 February 2021 @ 22:07
      Thanks! But Mike obviously has nothing to worry about...
  • PG
    Philippe G.
    20 February 2021 @ 21:49
  • DG
    Dom G.
    20 February 2021 @ 18:15
    Corey's one of the best dudes out there! Such a humble and wickedly smart fella
    • CH
      Corey H.
      20 February 2021 @ 21:07
      You're too kind. Thank you.
  • DA
    David A.
    20 February 2021 @ 09:34
    This was one of the best discussions I have heard about the impact of passive investing and volatility targeting and I find Hoffstein's "liquidity cascades" thesis persuasive. I was genuinely surprised, therefore, to see that his ETF has performed poorly, being basically flat since inception. Acting successfully on your insight is still hard.
    • CH
      Corey H.
      20 February 2021 @ 21:07
      Hi David -- A bit hard to discuss funds for regulatory reasons... That said, the index we manage (which the ETF tracks) is pure trend following, so it's meant to be used as a building block with other complementary positions. The mutual fund we manage was purely trend following until late November. The fund name and prospectus was updated to reflect the new methodology, which is informed by our research on liquidity cascades. Thanks for watching! Corey
  • MC
    Mark C.
    20 February 2021 @ 01:19
    Great interview. Look forward to seeing him again. Thanks
  • LP
    Louis P.
    19 February 2021 @ 22:29
    Very interesting interview! A different angle of this dynamic could be found in the book "The rise of carry". Thanks Corey and Jason!
  • OC
    O C.
    19 February 2021 @ 22:13
    Please add captions to this. Thank you.
  • SR
    Sarah R.
    19 February 2021 @ 21:57
    Smart guy. Bring him back for more.
  • RY
    Roy Y.
    19 February 2021 @ 12:18
    Great interview. Pity I can't access the report via docsend. Can you post an alternative link please.
    • JF
      Jack F. | Real Vision
      19 February 2021 @ 16:40
      Hi Roy, you have to input your email but you should be able to view it after that. If you're still having problems please email me at jack@realvision and I can send you a copy
  • RC
    Rafael C.
    19 February 2021 @ 16:36
    Great interview with practical advice!
  • KD
    Kelley D.
    19 February 2021 @ 14:57
    Brilliant interview "can there be a bubble in long vol?" question I have heard in long time..Perfect level of option discussion for I only had calculus, not differential equations in college :)
  • ML
    Max L.
    19 February 2021 @ 14:51
    Another great interview, cheers RV
  • MH
    Moritz H.
    19 February 2021 @ 13:22
    Great interview!
  • SR
    Sam R.
    19 February 2021 @ 12:54
    That was exceptional, guys. Thank you.
  • VP
    Veselin P.
    19 February 2021 @ 12:42
    Great, a long vol video to remind me I am still stupid! :)
  • JK
    Jonathan K.
    19 February 2021 @ 10:28
    One of the best interviews by far, perfectly summarizes the mechanics of the markets apparent today.
  • LF
    Louise F.
    19 February 2021 @ 09:23
    Extremely informative interview that explained a lot I did not understand about why markets can suddenly become volatile. Please bring him back for another interview!