“What surprised me is that once you understand the idea, it’s one of those cases where you’re like ‘Oh yes, of course!’ but nobody else has come up with it. It’s an example of something that could be a game-changer,” says one pension client.
There’s no such thing as a free lunch, of course, and under some conditions the strategy could underperform – the structure effectively transfers risk from the left-tail of the return distribution (risk-off events) to the right tail (aggressive market rallies). Investors may be swapping gap-down risk for gap-up risk, but according to one satisfied customer, “it’s a very good late-cycle trade”.
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