Patrick Kazley opens with a candid admission: "Outside of a Japanese garden, there is no such thing as a perfect hedge." The concession is deliberate. What follows is not a claim to have solved an unsolvable problem, but a rigorous argument that the pursuit of it, properly structured, produces significantly better outcomes than abandoning the goal altogether. Over an eleven-year live out-of-sample period, One River's risk mitigation framework1 delivered roughly 1.5x higher annual returns on lower downside volatility than unhedged equity exposures. The evidence is hard to dismiss.
The framework rests on three distinct layers, each addressing different dimensions of market risk.
First Responders, and the Cost of Being There
The first layer, Long Volatility strategies, functions as what Kazley calls the "fast-twitch muscle" of the portfolio. Equity Hedges and Macro Asset Hedges belong here. Their defining trait is speed of response in sudden dislocations: COVID, 2008, 1987. Their defining cost is negative carry in calm markets. One River's Equity Hedge composite returned 4.6% annualized from April 2015 through May 2026, with a skew of 6.9 and a downside volatility of just 2.1%, while the S&P 500 returned 14.3% with a skew of -0.4. That tradeoff, low carry against highly asymmetric crisis protection, is the design. Kazley notes that a good hedge "should always be there when you need it, but not necessarily always when you want it." Importantly, the paper demonstrates that negative carry does not necessarily detract from total portfolio returns when the hedge is paired with additional equity exposure. The Long Volatility Combined Hedge delivered a Sortino ratio of 2.0 versus the S&P 500's 1.2, on a portable alpha basis.
Second Responders, and the Case for Model Diversity
Where First Responders falter, in slow grinding drawdowns, Systematic Trend Following takes over. Kazley frames Trend as the "slow-twitch muscle," noting that prolonged declines like the Tech Bubble, the GFC pre-Lehman, and 2022 are precisely the environments where Trend earns its place. Crucially, One River's approach to Trend is deliberately diversified across signal types, time horizons, and model architectures. The evidence from Exhibits 6, 7, and 8 is consistent: no single implementation wins persistently, but diversified composites hold up across regimes. "Complexity in model construction for a pure Trend process usually succeeds in producing diversification," Kazley writes, "but not necessarily better returns over the long run." The firm uses both Integrated and Segregated model approaches with roughly equal weighting, reducing path dependence rather than optimizing for past performance.
The Risk Responders composite, combining Long Volatility and Trend, returned 22.8% annualized on a Total Portfolio basis against 14.3% for the S&P 500, with a Sortino ratio of 2.4 and a Skew of 0.9.
Diversifiers: Optional, but Dangerous if Overdone
The third category is the most nuanced. Diversifiers are not required in a risk mitigation program, but they can raise the benign-market return floor, which matters for institutional staying power. The risk is importing the wrong characteristics. Kazley is direct: diversifiers "should not be a source of short volatility or concavity." Strategies with negative skew, however market-neutral they appear, can undercut the convexity the whole program is designed to generate. The bar is high: genuinely uncorrelated, capital-efficient, explicitly biased toward long convexity. And they should occupy only a minority of the risk budget.
Exhibit 11 offers one of the paper's sharpest insights. A hedge fund-of-funds with a +0.7% annualized return neither helps nor detracts from an S&P 500 portfolio as an overlay, while a Long Volatility Hedge with a -1.0% annualized return actually improves it. Correlation and convexity do more work than standalone returns in this framework.
The Evaluation Problem
Underlying all of this is a structural challenge: most institutional portfolios still evaluate risk mitigation strategies in isolation rather than on their contribution to total portfolio outcomes. Kazley attributes the low adoption of RMS not to lack of evidence but to what he calls "faulty evaluation criteria." The Total Portfolio Approach is the corrective. It asks a single question: does adding this strategy improve total portfolio compounding? The answer, across eleven-plus live years, is consistently yes.
5 Key Takeaways for Advisors and Investors
1 Negative carry in a hedge is not a reason to avoid it. Paired with equity exposure on a portable alpha basis, long volatility strategies have meaningfully improved total portfolio outcomes even through one of the strongest equity bull markets on record.
2 Trend Following fills the gap First Responders cannot. In slow, prolonged drawdowns, long volatility strategies lose effectiveness. Systematic Trend is the complementary second layer, built to profit from exactly the sustained directional moves that equity hedges miss.
3 Model and signal diversification in Trend is not optional. No single Trend implementation persistently leads. Composites of diversified models, across signal types and time horizons, reduce path dependence and improve long-run reliability.
4 Diversifiers must be screened for convexity. Strategies that appear market-neutral but embed negative skew can counteract the defensive character of the broader RMS program. Capital efficiency, positive convexity bias, and minority risk allocation are the appropriate guardrails.
5 Evaluate risk mitigation at the total portfolio level. Standalone returns are the wrong lens. The correct question is whether adding the strategy improves total portfolio compounding. The evidence says it does, even over one of the most favorable equity environments in a century.
Footnote:
1 Kazley, Patrick. "The Perfect Hedge: An Allocator's Guide to Constructing a Risk Mitigation Program for the Total Portfolio." One River Asset Management, July 2026, www.oneriveram.com.
