Market Neutral Yield
A hedged yield vault can earn yield in a number of ways, the key point is being market neutral, i.e. it's indifferent to market movements up or down.
A delta neutral strategy involves holding equivalent assets both long and short to net out exposure to that asset, and taking advantage of potential yield opportunities from one side.
A example of this hedged yield vault is LPing volatile assets like MATIC and simultaneously taking a short position on those assets (borrowing on Aave). This means that the vault has almost no exposure to MATIC price volatility (delta neutral), while earning trading fees and farming rewards from the LP.
As the price of MATIC moves, the vault rebalances both the hedge and the Aave position. It rebalances the hedge by either increasing the Aave position, or increasing the LP position when a threshold is reached to rebalance the hedge. It rebalances the Aave debt position also to keep the Aave Health Factor within a threshold (target Health Factor of 1.4).
With low price volatility, the vault will have little rebalancing and can earn trading fees with minimal cost. This is how the yield is generated for the strategy.
Below simplifies the strategy output once the hedged position cancels out the LP position. Periods of lower volatility result in decreased strategy costs.
Aave+Rebalancing Costs represent the costs of Lending and Rebalancing
Given this is a Dynamic Vault like other Toros services, the strategy will actively hunt pairs it can delta hedge with those that are either highly incentivized or demonstrate low volatility to minimize volatility decay.
Note - For strategy effectiveness the Polygon Dynamic Vault is capped. At time of documentation the cap is $1M.