Déjà Vu … All Over Again

Eli Pars, CFA

Summary Points:

• Calamos Hedged Equity Fund benefited from the strong equity market move in the first quarter of 2024.
• The fund’s performance in the first quarter aligned with our goal of capturing S&P 500 upside with less exposure to downside.
• The 65/35 option trade we put into place earlier this year remains attractive, in our view.

As an equity alternative, Calamos Hedged Equity Fund employs an active options-based strategy to seek upside participation in the equity market while limiting downside exposure. Given the uncertainties in the market and the potential for the unexpected, we are dedicated to being favorably positioned for as many market outcomes as possible.

In 2023, the fund benefited from a rise in interest rates and a benign equity volatility environment, conditions which proved advantageous during the first quarter, as well.

The fund continues to be well served by our 65/35 trade. As we discussed in our previous commentaries (e.g., see “Focused on Capitalizing on—not Capping—Equity Upside”), market conditions gave us the opportunity to set up an especially attractive option trade, structured to pursue 65% of the market’s upside and 35% of the market’s downside at its expiration in December 2024.

This trade existed in part because a higher interest rate environment provided an attractive environment for us to sell calls, and these opportunities continue to be available to us, despite the rally we’ve seen in the equity markets. (For a deeper dive into why this trade represents an unusually compelling opportunity, see “CIHEX Set to Capitalize on What We’re Calling a Cicada Trade.”)

While the appreciation in the market moved the goalpost for our original trade, putting the trade on today would result in a similar risk/reward tradeoff. To balance the potential outcomes for longer standing and newer investors, we increased the fund’s downside risk mitigation a bit in March by selling calls and increasing our put hedge.

Conclusion

Markets can move quickly and strategies that are locked into static, rules-based approaches can expose investors to risks and limit upside opportunities. In contrast, we believe our active approach—combined with decades of options experience—provides us with an important edge. As we have noted, although our 65/35 trade could be considered a rules-based strategy on its face, our ability to adjust it as market conditions warrant is what makes the difference.

CIHEX: A History of Capturing Equity Upside, Managing Downside Volatility

Source: Morningstar. Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Please refer to Important Risk Information. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

The fund’s gross expense ratio as of the prospectus dated 3/1/2024 is 0.92% for Class I shares.

Average annual total return measures net investment income and capital gain or loss from portfolio investments as an annualized average. All performance shown assumes reinvestment of dividends and capital gains distributions.