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Be Wary of This Type of Option-Writing Fund

Low beta option funds' attractive track records and diversification benefits can obscure tail risks.

Tayfun Icten: Investors seeking diversified strategies to improve their portfolios' risk-adjusted returns consider funds in the option writing category, but this category does not have a uniform strategy.

In this chart, we rank ordered the funds with at least two years of track record according to their beta exposure to the S&P 500 index. As you can see in this chart, median beta exposure is about 0.5 with a wide dispersion of betas. A typical fund holds a long equity position, sells in-the-money calls (on the reference asset) to enhance yield in the portfolio, and buys out-of-the-money puts for some limited downside protection.