“Jack Hughes is the poster boy after he scored one of the most dramatic goals in Olympic hockey history…Hughes was in the spotlight afterwards, but the victory was built on the back of goalie Connor Hellebuyck, who made 41 saves, many of the highlight-reel variety, especially during a 19-8 advantage by Canada in the second period.”
Jack Hughes scores in OT, Team USA wins Olympic gold medal game against Canada | NHL.com
Just a wonderful real-world example of all that we espouse! The objective is to win the game. That is accomplished by what happens inside the respective goals. Preventing goals and scoring goals is what determines the outcome. For one time only, we just cannot resist converting our trademark football pitch visual into a hockey rink.
Figure 1: Frequency vs Magnitude. Normal Distribution (black) and Shannon’s Entropy Curve (yellow). Shading by Percentile Contribution to SPX Index 40yr CAGR. Mar 1986 – Feb 2026
Source: Bloomberg, Convex Strategies
Canada dominated the play and peppered the USA goal with shots. But one solid goalkeeper turned what could have been a rout into an historic Olympic gold medal. This is the goal of explicit loss mitigation in an investment portfolio, provide the convexity/protection in the toughest of times, allowing for the exploration of upside opportunities that lead to winning goals.
This very discussion is at the heart of what we speak about every day. In particular as it relates to the gathering momentum behind “Total Portfolio Approach” (TPA). We had touched, in our November 2025 Update – “Aggressively Defensive” (Convex Strategies | Risk Update: November 2025 – “Aggressively Defensive”), on the announcement that the largest US pension fund, CalPERS, had hired former TPA practitioner Stephen Gilmore (previously of Future Fund and NZ Super) to undertake the transition to a TPA strategy.
Mr. Gilmore appeared recently on the Capital Allocators Podcast with Ted Seides to discuss his vision. For anybody even loosely interested, this is a very worthwhile listen.
CalPERS’ Total Portfolio Approach – Capital Allocators with Ted Seides
In response to Ted’s question about what he hoped to achieve, Stephen gave this very straightforward answer.
“5-10 years from now I hope we are more fully funded than we are at the moment.” Stephen Gilmore, February 2026.
While it seems obvious that such should be the case, going back to our discussions last month (Convex Strategies | Risk Update: January 2026 – “Simon’s Scissors”) around the classic Stafford Beer mantra of “the purpose of a system is what it does”, history might seem to indicate that achieving funded status has not been the purpose of their system. Setting as the objective to be “more fully funded” aligns precisely with our own constant emphasis on compounding capital, growing wealth, through time. That which must obviously be the objective of the end capital owner, aka the future retiree.
This is why we so loved the quote that we highlighted in our October 2025 Update – “History Matters” (Convex Strategies | Risk Update: October 2025 – “History Matters”) from this wonderful CAIA paper expanding on the concept of TPA.
Vision to Execution: How Investors are Operationalizing the Total Portfolio Approach | CAIA
“Remaining faithful to the TPA mindset demands vigilance, humility, and grit. It also offers something rare in our industry: the possibility of true alignment between capital and purpose.” Aaron Filbeck, CAIA, October 2025.
It has long been our complaint, as to the most basic flaw of the financial fiduciary industry – there is just no benchmark or incentive for the geometric compounding through time that must be the primary objective of end capital owners. The good folks at CAIA are pointing just this out as they note the purpose of TPA could, finally, align fiduciaries to capital owners. Hallelujah!
John Bowman, the CEO of CAIA, penned a recent note laying out more of the evolving thoughts on TPA. He stresses one of the core pillars of TPA as being the competition for capital.
“The defining ethos of the TPA model is the competition for capital.” John Bowman, CAIA, February 2026.
This, of course, gets right at the heart of what we have been forever advocating. We would say that Step #1 in the transition to a TPA world is to free up capital that has been tied up in faux diversifiers. This is precisely the concept behind our race car analogy – put brakes on your car so that you can, safely, drive faster. Explicit loss mitigating strategies free capital, making it available for competition amongst participating strategies.
As we have said so many times before, the whole premise behind traditional Sharpe World investment strategies has been to mitigate risk by driving slowly, holding capital away from participating opportunities. The main concept of diversification has been to load up capital in strategies that act as ballast in hopes that by foregoing upside you probably won’t crash on any unexpectedly tight curves. This is the whole purpose of the Sharpe Ratio (aka the Wittgenstein Ruler of investment strategies) – explicitly forego upside, to probabilistically reduce downside – a clear recipe for volatility drag and negatively skewed returns. It is the clear implementation of the flaws of pursuing expected utility, while impeding actual utility.
Figure 2: Expected vs Actual Utility in the Coin-Toss Gamble
Source: Expected-utility maximizers don’t maximize utility. – Ergodicity Economics
Stephen Gilmore mentions it in the above linked podcast.
“I would like to have a greater exposure to diversifying strategies.” Stephen Gilmore, CalPERS, February 2026.
We want to believe that his meaning here is ‘truly diversifying strategies’. Strategies that will allow CalPERS to put more of the capital to work in the best participating upside strategies. If, as he stated, the objective is an improved funding status, then he must be focusing on the compounding effects of the divergences from the mean of expectations and, thus, be refocusing the portfolio towards greater positive convexity, ie explicit loss mitigating strategies allowing for greater upside participation.
Regular readers will be well familiar with the work on exactly this issue from one of the vocal proponents of TPA, Singapore’s own sovereign wealth fund Government of Singapore Investment Corporation (GIC). We have referenced in several past notes the work done by GIC, along with JP Morgan Asset Management (JPM AM), on improving the overall portfolio implications of diversifying strategies. They look across a broad universe of hedge funds as means to improve risk adjusted returns in a traditional 60/40 balanced portfolio.
Building a Hedge Fund Allocation: Integrating Top-down and Bottom-up Perspectives | GIC ThinkSpace
The two key findings, not surprisingly:
- “The integrated hedge fund portfolio funds its allocation from bonds.
- “The hedge funds consist entirely of the Loss Mitigation sub-group.
In other words, yes there is a benefit to replacing bonds with hedge fund strategies and, at the total portfolio level, all the allocation to hedge fund strategies should go to loss mitigating strategies. The drivers for the allocation are negative correlation, performance during major market drawdowns, and the reliability of that performance.
We went into it in quite a bit of detail in our May 2025 Update – “Just Do It” (Convex Strategies | Risk Update: May2025 – “Just Do It”) For a quick refresher, we will show again here the adapted version of the research that we constructed adding an additional hedge fund strategy-type that was inexplicably left out by the GIC/JPM AM team. That being what we have dubbed “Explicit Loss Mitigation” and have proxied with our bootstrapped version of the old EurekaHedge Long Volatility Index with the new WITH Long Volatility Index. Our added strategy subset shows up in bright fuchsia.
So, by the three key metrics:
- Negative Correlation to Equity Markets
Figure 3: Universe of Hedge Funds including Explicit Loss Mitigation. Correlation to Equity Markets. Jan2011 – Dec2023
Source: Bloomberg, Convex Strategies
- Performance During Major Market Drawdowns
Figure 4: Universe of Hedge Funds including Explicit Loss Mitigation. Performance during Equity Drawdown. Jan 2011-Dec2023
Source: Bloomberg, Convex Strategies
- Reliability in an Equity Drawdown
Figure 5: Universe of Hedge Funds including Explicit Loss Mitigation. Reliability in Equity Drawdown. Jan2011-Dec2023
Source: Bloomberg, Convex Strategies
Our bright fuchsia boxes make it pretty clear why we say it was inexplicable that GIC/JPM AM chose to leave out our proxy for “Explicit Loss Mitigation”, particularly given what drove their final results. Sure, as they stated above, all of the allocation went to their “Loss Mitigation” sub-group and that managed to allow equities to replace a small additional piece of the bond allocation, beyond the fixed constraint of 20%, but the far superior impact of our “Explicit Loss Mitigation” sub-group across the key parameters takes over all of the allocation and allows for a total replacement of the bond allocation with additional equity holdings. Better brakes = faster driving.
Figure 6: Portfolio Optimization, including Explicit Loss Mitigation, to Sortino Ratio Determinant. Jan2005-Feb2023
Source: Bloomberg, Convex Strategies
This is exactly our point around “freeing capital”. The Explicit Loss Mitigation doesn’t use capital, per se, it protects capital, it frees up capital. It allows more capital to enter the “competition for capital” in the search for better investment opportunities.
We love this work from GIC/JPM AM. We do, however, question whether they have made much progress in their own transition towards a TPA methodology. We discussed this in our July 2025 Update – “Preservation” (Convex Strategies | Risk Update: July2025 – “Preservation”), when we got the annual release of GIC’s rolling performance.
GIC Report on the Management of the Government’s Portfolio for the Year 2024/25
We generated the below picture as a proxy for GIC’s rolling 20-year returns, compared to their own Reference Portfolio, and a hypothetical example of what their own research, after our moderate adaptation, would have recommended.
Figure 7: 20yr Hypothetical Compounding Paths vs Target Return. Reference Portfolio (light blue). Proxy Portfolio (dark blue). Barbell Portfolio (gold). 2005-2025
Source: Bloomberg, Convex Strategies
Their research is pointing them on the right path. The implementation doesn’t seem to have yet taken shape. We suspect, like most of the advocates of TPA, they are struggling to overcome some of the initial hurdles.
The first of the CAIA papers, and one which GIC itself contributed to, clearly notes a number of these challenges.
The Rise of Total Portfolio Approach
The most challenging but worthy endeavor of TPA is for investment teams to break down silos… these organizations had to rethink their incentive structures.” Aaron Filbeck, CAIA, October 2025.
Stephen Gilbert, again in the above podcast link, discusses the importance of linking incentives to the total portfolio level. This seems obvious but has been far from the case in the historical construction of most in the current investment management universe.
Another hurdle is the historical wedding to Sharpe World optimization methodologies. It is easy to precisely target Expected Return/Utility, and to precisely optimize to historical averages, while assuming stable historical average correlations and volatilities. Unfortunately, it is the divergences from those averages that drive the compounding paths. It is not possible to precisely optimize to Actual Utility as, unlike like Expected Utility, we don’t know what it is!
It is, however, this very uncertainty that makes our portfolio decision so straightforward. When dealing with uncertainty, build resilience. Eliminate the unrecoverable with brakes on your race car, powerful goalkeepers in your ice hockey/football line-ups, and explicit loss mitigation at the very core of your Total Portfolio Approach (or any other risk and investment strategy, for that matter).
We said it this way in our “Just Do It” note.
“Trying to use your old expected-return-optimization tools to find the right answer to optimizing a portfolio to the divergences from expectations, is not going to find a solution, we would suggest. Trial and error, learn as you do, is the answer to this puzzle.” Convex Strategies, May 2025.
The good folks at CAIA frame it very much the same way in their note from October last year.
“Boards and oversight committees are more likely to support TPA initiatives when they understand the phased, trial-and-error nature of implementation.” Aaron Filbeck and Jayne Bok, CAIA, October 2025.
Back to the race car analogy. First, put good brakes on the car, then go out and experiment with driving it faster. Experiment with the engine, with aerodynamics, with transmission, with steering columns, with tyres. Learn how all these things work together to drive faster and how your confidence grows in line with learning the efficacy of the brakes. In portfolio terms, start adding the Explicit Loss Mitigation, freeing capital to compete across a broad spectrum of participating investment opportunities. Learn how those things complement each other. Learn how the brakes improve your resilience to unknown future outcomes and use that to search out things with unbounded upside potential.
Going back again to our “Preservation” note, we added to figure 7 above this additional strategy, an example of what we would call an “Aggressively Defensive” strategy. We dubbed this portfolio the “Preservation Portfolio” as an ode to GIC’s official mantra of “Preserve and Enhance”.
Figure 8: 20yr Hypothetical Compounding Paths vs Target Return. Reference Portfolio (light blue). Proxy Portfolio (dark blue). Barbell Portfolio (gold). Preservation Portfolio (Fuchsia). 2005-2025
Source: Bloomberg, Convex Strategies
We call this the Preservation Portfolio because half of the total allocation goes to what we would consider explicit preservation, a 25% allocation to Gold and a 25% allocation to our bootstrapped Long Volatility Index. Sounds aggressively defensive. For the enhance half of the portfolio, we have used the Nasdaq 100 Total Return Index (XNDX Index) as a place one might park an allocation focused on innovation and growth while looking for even bigger ideas. Aggressively defensive, hypothetically, has worked out pretty well.
It is just being very aggressive in the respective goal boxes, tying up fewer resources in the centre of the pitch/rink.
The point being, we don’t know what is going to happen. How much of your resources do you want to tie up on the things that you (think) you know, versus on the massively larger universe of the things you don’t know? It is impossible to forecast the future course of our car race; all we can control is the resiliency of our race car.
We got another reminder of that just a couple of weeks ago. We have labelled it, preliminarily, on our Endogenous vs Exogenous chart as “Iran”.
Figure 9: Endogenous vs Exogenous. EUR FX 9mth 25delta Butterfly. 2007 – Feb2026
Source: Bloomberg, Convex Strategies
The point of this picture is that the red letters are the ex-post labels we give to explain away risk as something we couldn’t foresee. They are the lightning strikes, or kids playing with matches, that we blame the fire on. In reality, the risk is endogenous. The risk is the red circles. It is the buildup of connective dry brush in the forest the elevates the risk of a spark, not just burning one tree, but spreading throughout the forest in a devastating conflagration.
We will see how this latest spark plays out. One thing, however, is always the same. Investors with ample explicit loss mitigation in their portfolios, good brakes on their race car, will be driving much less anxiously than those that were optimizing to an average expected outcome and relying on stable correlations and slow driving as their core risk management tools.
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