Rebuffed: A Closer Look at Options-Based Strategies

Options-based strategies have grown rapidly, promising equity-like returns with less downside risk through structures labeled as buffered, overlay, or defined outcome. AQR’s analysis of 99 such funds with histories back to early 2020 finds that every one underperformed the S&P 500 in cumulative returns over the period. Most did deliver smaller drawdowns than the market, so they provided some protection when equities fell.

The problem is that this trade-off has been consistently poor: investors are giving up more upside than they are gaining in downside protection. Both empirical results and economic theory suggest these “free lunch” narratives around options-based products often mask a structurally bad deal for long-term investors.