Nevertheless, option strategies can be effective alternatives to hedge funds especially if there is a market view. We mention the issue of market view because low cost option strategies will often buy puts to protect a percentage of the portfolio or protect against a specific sized move and selling calls is used to generate premium to pay for the puts. The call selling is based on either a market view or a willingness to limit upside.
On the one hand, investors access the skill of the hedge fund manager versus the direct pay-off from options which do not include all the fees associated with a hedge fund. Given that option should be cheaper, a simple question is whether hedge fund skill can cover their costs and also outperform an option strategy.
The results show that the combined option strategies of buying puts and selling calls against the index generated higher returns and have better return to risk characteristics. The numbers are economically significant and should be persuasive even to motivate any investor to take a closer look at the value of these strategies as a hedge fund alternative.
There are a host of management issues with trying to implement options strategies as well as regulatory barriers, but all of these can be effectively addressed. Why limit diversification alternatives to hedge funds when there are option strategies that can provide better choices?