There Ain’t No Such Thing as a Free Lunch

Equity investors face real emotional and financial challenges, so it is understandable that products promising smoother rides have strong appeal. Our latest research, published in the Journal of Portfolio Management, examines buffer funds as a modern incarnation of option-based “comfort” strategies and finds that they fail to deliver on their promise. Over time, these funds have produced weaker risk-adjusted returns than their reference assets and even lagged simple stock-and-cash mixes designed to match equity beta.

The gap stems from structural headwinds: paying for volatility exposure, trading costs embedded in the options, and fund fees all erode the benefit of engineered payoffs. For advisors and investors seeking to manage equity risk, the evidence suggests that straightforward allocation changes can be more effective than complex structures that merely repackage market exposure at a higher cost.