Do structured products improve portfolio performance? A backtesting exercise

In this paper, we show how the inclusion of structured products affects the performance of a portfolio of primary assets. We consider fairly priced, synthetic structured products (convertible bonds, reverse convertibles, or barrier reverse convertibles) that we include in a 60/40 portfolio (60 % stocks and 40 % bonds), a typical portfolio held by institutional investors. We demonstrate that including structured products in the 60/40 portfolio generally lowers returns and risk-adjusted performance across all product types. Moreover, we evaluate the opportunity costs – in terms of utility – of including structured products in the 60/40 portfolio. We demonstrate that the opportunity cost is overwhelmingly negative, implying that investors who choose to include structured products in their portfolios suffer from a disutility. Our findings are robust to alternative settings. We expect further performance deterioration for real-world structured products that are highly illiquid, exhibit high transaction costs, and are often more complex than the products we are considering.