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By Opalesque:

In his August 2025 analysis, Cliff Asness, founder of global investment management firm AQR Capital Management, examines "buffer funds" - structured investment products that promise to make equity investing less risky by using options strategies to limit downside while capping upside returns. These funds, which are essentially sophisticated versions of traditional collar strategies, have gained popularity particularly among baby boomers seeking portfolio protection.

However, he concludes definitively that buffer funds don't work as advertised. AQR's research, published in the Journal of Portfolio Management, reveals fundamental structural problems with these products.

The math doesn't add up

Buffer funds face a basic mathematical challenge: they have one positive factor (the underlying asset's expected returns) working for them, but three negative factors working against them:

• Losses from being exposed to volatility risk premiums • Trading costs from options transactions • Management fees

The study's key findings show buffer funds consistently underperform:

• They deliver worse risk-adjusted returns than their underlying reference assets • Performance degradation worsens over time • Actual returns often diverge significantly from advertised payoff diagrams • During the three largest market drawdown......................

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