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The Opportunities That Arise When Markets Move Fast

I am in the camp that gets excited about volatile times. Increased volatility creates additional opportunities. Also, since we are on the hedged side of the business, we are in a unique spot to be able to capitalize off market swings.

Market movement creates opportunities for us to adjust our hedges, but also to alter or exit many of our trades and enter into new trades that didn’t exist previously. And, as volatility increases we find that asset class correlations break down.

In ordinary uneventful times there is high correlation among securities of the same or similar issuers across asset classes. While equities, convertibles, high yield and options are traded by largely different players and desks, and ultimately held by different end investors, they are highly correlated. Convert guys know what price the high yield bonds trade at and at what volatility the options trade. Those desks in turn should be focused on convert and equity valuations.

Normally, markets are fairly efficient and quick to adjust when other asset classes move. When volatility increases, though, markets move fast and each player has a tendency to focus more on their market and less on the other markets.

We can take advantage of these dislocations to create arbitrage situations or to adjust positions. Additionally, we can take them as a warning sign that other markets are pricing in risks that our market hasn’t yet.

David O’Donohue
Vice President, Co-Portfolio Manager

The first thing I do when markets are moving fast is make sure we are positioned well and prepared. After that, I look for opportunity:

  • How can I take advantage of this move to adjust our trades and hedges (i.e., lock in profits on shorts or puts, buy back calls we have sold, etc.)?
  • Are single name option volatilities spiking and can I take advantage of this to create an arbitrage vs. our convertible positions?
    • The listed option market moves faster and has larger moves than converts.
    • We can use listed options opportunistically.
      • Hedge—forward trade our gamma (sell puts or calls instead of covering or shorting stock—see page 32).
      • Lock in value or create arbitrage—we are long volatility through our converts and can sell in listed market to create arbitrage.
  • Which names will benefit or suffer from this move and has the market adjusted them yet? (A deep-in-the-money name which now will become balanced, for example, or a balanced name where the credit is deteriorating.)
  • Formulate a game plan for the next move—after an equity sell-off we look at what will we do and which names/trades will benefit if we continue lower or if we snap back.
    • If market continues lower
      • Which names/trades benefit from the next leg down
      • What opportunities might the next leg present (volatility arbitrage, hedge adjustments, etc.)
    • If we snap back
      • Which names didn’t recover (but should have?)
      • Which opportunities do I get a second chance to add that I realize I missed before?
      • Did our portfolios/securities perform as we expected and if not should we adjust?
Return to the Volatility Guide

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information or call 1-800- 582-6959. Read it carefully before investing.

Disclosure

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Past performance is no guarantee of future results.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

The S&P 500 Index is considered generally representative of the U.S. stock market. Indexes are unmanaged, do not entail fees or expenses and are not available for direct investment.

MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in North America, Europe, and Asia/Pacific region.

BofA ML All U.S. Convertibles Index (VXA0) is comprised of approximately 700 issues of only convertible bonds and preferreds of all qualities.

The Barclays U.S. Aggregate Bond Index covers the U.S.- te, taxable bond m denominated, investment-grade, fixed-ra arket of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

The MSCI EAFE Index is an arithmetic, market value-weighted average of the performance of securities listed on the stock exchanges of selected countries in Europe, the Far East and Australia.

The MSCI Emerging Markets Index represents large and mid cap companies in emerging markets countries.

The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*-- excluding the United States.

The HFRI Equity Hedge Index consists of funds where portfolio managers maintain long and short positions in primarily equity and derivative securities.

The Nasdaq Index is the market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange.

The Russell 2000 Index measures U.S. small-cap stocks.

The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

Important Risk Information.An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s).There can be no assurance that the Fund(s) will achieve its investment objective

Investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. More detailed information regarding these risks can be found in the Fund’s prospectus.

Some of the risks associated with investing in alternatives may include hedging risk, derivative risk, short sale risk, interest rate risk, credit risk, liquidity risk, non-U.S. government obligation risk and portfolio selection risk. Alternative investments may not be suitable for all investors.

The principal risks of investing in the Fund(s) include:

Focus Growth Fund: equity securities risk, growth stock risk, value stock risk, foreign securities risk and portfolio selection risk.

Convertible Fund: convertible securities risk, synthetic convertible instruments risk, foreign securities risk, equity securities risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

Discovery Growth Fund: equity securities risk, small and mid-sized company stock risk, growth stock risk, foreign securities risk and portfolio selection risk.

Dividend Growth Fund: declining equity values; losses from MLPs related to lack of portfolio diversification, changes in tax laws, lack of liquidity, declining equity values, and conflicts over control rights; incorrect selection or judgments on portfolio holdings by the investment advisor; increased transaction costs because of frequent turnover; losses from currency fluctuations; lack of liquidity or correlation to underlying securities in the options market; and potential illiquidity of securities purchased privately under Rule 144A.

Emerging Market Equity Fund: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, currency risk, geographic concentration risk, American depository receipts, mid-size company risk, small company risk, portfolio turnover risk and portfolio selection risk.

Evolving World Growth Fund: equity securities risk, growth stock risk, foreign securities risk, emerging markets risk, convertible securities risk and portfolio selection risk.

Global Equity Fund: equity securities risk, growth stock risk, value stock risk, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk.

Global Growth and Income Fund: convertible securities risk, synthetic convertible instruments risk, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

Growth Fund: equity securities risk, growth stock risk, mid-sized company risk, foreign securities risk and portfolio selection risk.

Growth and Income Fund: convertible securities risk, synthetic convertible instruments risk, equity securities risk, growth stock risk, small and mid-sized company risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

High Income Fund: high yield risk, convertible securities risk, synthetic convertible instruments risk, interest rate risk, credit risk, liquidity risk and portfolio selection risk.

International Growth Fund: equity securities risk, growth stock risk, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk.

Long/Short Fund: equities securities risk, short sale risk, options risk, portfolio selection risk, liquidity risk, convertible securities risk, synthetic convertible instruments risk, leveraging risk, portfolio turnover risk, foreign securities risk, growth stock risk, small and midsized company risk, emerging markets risk, derivative risks, futures and forward contracts risk, interest rate risk, credit risk, and cash holdings risk.

Market Neutral Income Fund: convertible securities risk, synthetic convertible instruments risk, convertible hedging risk, covered call writing risk, options risk, short sale risk, interest rate risk, credit risk, high yield risk, liquidity risk and portfolio selection risk.

Mid Cap Growth Fund: declining equity values; higher volatility from growth and mid-cap companies to changes in the economic; incorrect selection or judgments on portfolio holdings by the investment advisor; increased transaction costs because of frequent turnover; losses from currency fluctuations; lack of liquidity or correlation to underlying securities in the options market; and potential illiquidity of securities purchased privately under Rule 144A.

Total Return Bond Fund: interest rate risk, credit risk, high yield risk, liquidity risk, mortgage-related and other asset-back securities risk, including extension risk and prepayment risk, U.S. Government security risk, foreign securities risk, non-U.S. Government obligation risk and portfolio selection risk.

Opportunistic Value Fund: equity securities risk, value stock risk, small and mid-sized company risk, foreign securities risk and portfolio selection risk.

Hedged Equity Income Fund: covered call writing, options, equity securities, correlation, mid-sized company, short sale, interest rate, credit, liquidity, portfolio selection, portfolio turnover, foreign securities, American depository receipts, and REITS.

Global Convertible Fund: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk, forward foreign currency contract risk, portfolio selection risk, and liquidity risk.

Calamos Phineus Long/Short Fund: equity securities risk consisting of market prices declining in general, short sale risk consisting of potential for unlimited losses, foreign securities risk, currency risk, geographic concentration risk, other investment companies (including ETFs) risk, derivatives risk, options risk, and leverage risk.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

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Before investing carefully consider the fund's investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information or call 1-800-582-6959. Read it carefully before investing.

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