AMP and One River call for a defensive system, not a single hedge

AMP and One River Asset Management argue that allocators should build a defensive system rather than hunt for a better defensive asset, in a CAIA Association blog post published Aug. 4.

The authors' recommendation is to diversify the diversifiers across a defensive system. In the post 'In Search of the Perfect Hedge,' Stuart Eliot and Jonas Benner of AMP and One River chief executive Patrick Kazley frame the defensive task as covering "fundamentally different problems." Those stresses include sudden crashes, prolonged bear markets, inflation shocks, V-shaped reversals, policy mistakes and monetary debasement.

For allocators weighing a defensive sleeve, the argument supplies a diligence checklist. The authors ask whether any single asset or strategy can reasonably be expected to protect a portfolio from every form of stress. Applied to a sleeve under review, that makes coverage the question: which of those stresses a manager is built for, and what it does in the rest.

The authors put the bond case as a possibility rather than a verdict. They write that it is "certainly plausible" government bonds face a more difficult path given the starting point of the global monetary system, and that bonds may instead become headwinds during inflationary crises or a prolonged debasement aimed at solving nominal debt problems. As evidence, they note that US gross federal debt relative to GDP is higher than during World War II.