Rebuffed: A Closer Look at Options-Based Strategies

Dan Villalon, a partner at AQR, argues that options-based strategies—marketed as delivering market-like returns with less risk—systematically disappoint investors and fail on economic grounds. These strategies, which use options to tailor risk/return profiles, have attracted $234 billion into Morningstar's options-related categories, yet the data tells a stark story. Villalon examined 99 options-based funds with histories back to January 2020. Of these, 100% delivered lower returns than the equity market, failing the first test of the value proposition. While 86% did achieve smaller drawdowns than the market, the trade-off is lopsided: investors gave up upside participation without reliably capturing the downside protection they were promised. The conventional sales pitch claims these strategies provide equity market participation with less downside—a claim that is "eminently doable using options," Villalon notes, but "doesn't come for free." The core problem runs deeper than performance. Economic theory predicts these strategies should disappoint because downside protection via options carries a real cost that must be paid through foregone returns. Villalon frames the issue as a mismatch between what these strategies claim to deliver and what they actually deliver: a bad deal dressed up as a free lunch.