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August Was Wild, and Our Alts Worked

In the context of the last 12 months, August 2019's S&P 500 return of -1.58% is relatively unremarkable. Nine months of the previous 11 posted bigger moves.

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But the chart above belies how wild August truly was. The S&P 500 moved more than 1% in half of the month's 22 trading sessions. Included were three declines of at least 2.6% (August 5, August 14 and August 23). The -2.97% drop on August 5 was the worst day of the year to date.

The daily gyrations made for a white-knuckled ride for equity investors, shaking the confidence of some in such an unpredictable market. While September has started with big upswings, last month demonstrated that what goes up can fall back down hard.

Every financial advisor recognizes that volatile markets present an opportunity to demonstrate his or her value. At Calamos we have a similar take: These are the markets our alternative funds are made for, an opportunity to demonstrate why they're worthy of your consideration as a core allocation in clients' portfolios.

Indeed, August performance data provides a fresh illustration of how Calamos alts work.

CMNIX Provided Stability

We'll start with Calamos Market Neutral Income Fund (CMNIX), a fixed income alternative that has proven its ability to potentially provide stability to the portfolio during times of market shocks (see post). The fund thrives on volatility, as the CMNIX team combines two complementary strategies: convertible arbitrage and hedged options. In a month when the S&P 500 was down and other alternative hedge categories (i.e., market neutral, options-based and long/short equity) all finished negative, CMNIX produced a positive month, demonstrating a consistency that the fund has become known for (see related post).

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The chart below tracks the intramonth progress of CMNIX against the Bloomberg Barclays U.S. Government/Credit Index and the Morningstar Market Neutral category. The August performance illustrates how the fund provided a low vol/positive return against both benchmark and peers:

  • Note how CMNIX tended to move inversely with the fixed income index. As Calamos Eli Pars, CFA, Co-CIO, Head of Alternative Strategies and Co-Head of Convertible Strategies, Senior Co-Portfolio Manager, has said,  the fund has minimum rate risk—and minimum rate opportunity.
  • CMNIX outperformed its market neutral peers by providing a less volatile return stream.

cmnix vs category vs index

CPLIX Minimized Exposure and Volatility

Michael Grant, Co-CIO, Senior Co-Portfolio Manager of Calamos Phineus Long/Short Fund (CPLIX) has repeatedly (see the latest post) expressed his concern about the market—and the fund has had negligible exposure, as a result. "If we can achieve low-double digit returns this year, without subjecting our clients to the inherent risks associated with current market dynamics by maintaining relatively new neutral exposure levels, we will have achieved our goal," Grant has said.

The August snapshot shows that CPLIX was relatively flat during the month's three worst days. For the month, the fund slightly outperformed the MSCI World Index's return of -2.00% and slightly underperformed the S&P.

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CIHEX Limited the Downside

By blending a core long-equity portfolio with an actively managed option overlay, Calamos Hedged Equity Fund (CIHEX) is a way to potentially de-risk an equity portfolio without trading away all of the equity upside potential (see related post). CIHEX finished the month with a 22% down capture versus the S&P 500—note specifically how it held up on August's biggest down days.

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Advisors, please contact your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com for more information on our hard-working alts.

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Click here to view CMNIX's standardized performance.

Click here to view CPLIX's standardized performance.

Click here to view CIHEX's standardized performance.

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.

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. Your 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. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund's prospectus.

Alternative investments are not suitable for all investors.

The S&P 500 Index is generally considered representative of the U.S. stock market.

MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of 21 developed market countries in North America, Europe, and the Asia/Pacific region.

The principal risks of investing in the Calamos Market Neutral Income Fund include: equity securities risk consisting of market prices declining in general, 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, convertible hedging risk, covered call writing risk, options risk, short sale risk, interest rate risk, credit risk, high yield risk, liquidity risk, portfolio selection risk, and portfolio turnover risk.

Convertible Arbitrage Risk: If the market price of the underlying common stock increases above the conversion price on a convertible security, the price of the convertible security will increase. The fund's increased liability on any outstanding short position would, in whole or in part, reduce this gain.

Hedged Equity Risk: As the writer of a covered call option on a security, the fund foregoes, during the option's life, the opportunity to profit from increases in the market value of the security, covering the call option above the sum of the premium and the exercise price of the call.

Alpha is a measurement of performance on a risk adjusted basis. A positive alpha shows that performance of a portfolio was higher than expected given the risk. A negative alpha shows that the performance was less than expected given the risk.

Convertible arbitrage involves purchasing a mispriced convertible bond (long position) and simultaneously short-selling a calculated number of shares of the stock. As the manager waits for the prices to converge, the portfolio is insulated from price movements of the underlying stock. Using this technique, a manager seeks to enhance income and to hedge (or reduce) equity market risk.

Hedged equity involves selling (or "writing") a call option against an equity the writer holds. When managers sell a call option, they earn a premium from the option sale. If the shares trade below the strike price, the option will expire worthless and they keep the premium from the option and retain the security. If the share price exceeds the strike price, the buyer will likely exercise the option and the seller must sell the shares at the strike price. To hedge the risk, managers could also purchase put options to protect against significant equity market declines.

The principal risks of investing in Calamos Phineus Long/Short Fund include: 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.

The principal risks of investing in the Calamos Hedged Equity Fund include: covered call writing risk, options risk (see definition below), equity securities risk, correlation risk, mid-sized company risk, interest rate risk, credit risk, liquidity risk, portfolio turnover risk, portfolio selection risk, foreign securities risk, American depository receipts, and REITs risks.

Options Risk—the Fund's ability to close out its position as a purchaser or seller of an over-the-counter or exchange-listed put of call option is dependent, in part, upon the liquidity of the options market. There are significant differences between the securities and options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. The Fund's ability to utilize options successfully will depend on the ability of the Fund's investment advisor to predict pertinent market movements, which cannot be assured.

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