Buy-write funds were supposed to be one of the investment industry's brightest new ideas. But after initial success during the financial crisis, many are struggling to keep pace with the rebound.

Buy-write funds, also called covered-call funds, typically buy a portfolio of stocks, then sell call options on their holdings. The options generate income that can cushion against potential losses and boost funds' annual payouts, both features that are attractive to many income-oriented investors.

The strategy proved a big hit in the stingy yield environment during the years leading up to the financial crisis. At the time, a parade of new closed-end funds scored billion-dollar initial public offerings and buy-write exchange-traded notes and funds began to appear. Today, about three dozen buy-write vehicles hold roughly $27 billion, based on tallies by Morningstar Inc. and Lipper Inc.

Investors that bought buy-write funds at the height of their popularity likely saw their investments shielded from the worst of the bear market. But since then, the funds' record has been decidedly mixed. While selling call options can lead to easy profits as stocks fall, the strategy tends to cap investors' returns during a rally, since the buyers of the options share in the funds' gains. Funds' fat yields have come under stress, too, in part because funds stretched to maintain big payouts amid the crisis and in part because of shifting patterns in stock-market volatility.

The funds "did what they were supposed to do in 2008," says Morningstar Analyst Cara Esser. Since then, "the strategy hasn't been spectacular."

Measuring performance for buy-write funds as a group is tricky because the strategy can be interpreted many different ways, making funds hard to categorize. But returns of the PowerShares S&P 500 BuyWrite ETF (PBP), which tracks a common buy-write benchmark, offer at least one take. It did comparatively well during the financial crisis, posting a negative return of 29% in 2008, its first full year on the market. While substantial, the loss was considerably narrower than the Standard & Poor's 500's 37% decline.

Since then, however, the PowerShares ETF has steadily lagged. As a result, it has posted average annual declines of about 1.3% over the last three years, while the S&P 500 has gained 0.9% a year.

PowerShares says hypothetical tests of the fund's benchmark show returns that are "similar" to the S&P 500 over longer periods and with less volatility.

Perhaps an even bigger issue, especially for investors who own closed-end funds--the most common buy-write vehicle--is what may happen to these funds' hefty yields.

By selling call options on their stock holdings, buy-write funds generate steady income that, along with the stocks' dividends, can be handed back to investors. But because big yields are so popular, many funds also turn to another source to boost payouts further: proceeds from trading stocks in their portfolios. Relying on these trading profits works in a rising market, but the tactic is risky if stocks are flat or fall because it eats away at the fund's asset base.

While the stock market has bounced back from its financial crisis lows, closed-end fund analysts worry that past efforts to maintain distributions during the bear market and other factors, like recent declines in stock-market volatility that make selling options less profitable, have put funds' distributions at risk.

"There was a race for the highest yield," says Wells Fargo Advisors analyst Mariana Bush. Managers made assumptions that now seem "a bit optimistic."

One big-name company, Eaton Vance Corp. (EV) cut distributions on eight of its covered-call funds late last year, including Eaton Vance Tax-Managed Global Diversified Equity Income (EXG), whose $5.5 billion 2007 initial public offering remains the largest ever for a closed-end fund. Today, the fund yields 10%, according to Morningstar.

Others have resisted that move. BlackRock Inc. (BLK) has avoided cutting distributions on funds like BlackRock International Growth & Income (BGY), yielding 13%, and BlackRock Enhanced Equity Dividend (BDJ), yielding 11%, despite criticism from both Morningstar and Wells Fargo.

Eaton Vance said its distribution cuts helped make funds' new distribution levels "reasonable." BlackRock declined to comment.

-By Ian Salisbury, Dow Jones Newswires; 212-416-2241; ian.salisbury@dowjones.com