Raising the Bar on Equity Alts: Did They Protect in the Swoon—But Also Participate in the Snapback?

The majority of liquid alternatives were established in response to the Great Financial Crisis of 2008-2009, as a means of providing some protection against equity market declines. This most recent drawdown—the S&P 500’s plunge to -33.79% at its deepest on March 23—has been the most serious test yet of whether liquid alts perform as promised.

An article last week in Citywire, the publication for professional fund buyers, raises the bar by putting a spotlight on not just the alts’ performance in the “swoon” but also their participation in the snapback. Citywire considered the snapback period beginning March 24 and running through April 13, the cutoff date for the publication's analysis.

As a high level conclusion, “the liquid alts categories held up better,” according to Citywire. One exception noted: “lackluster” performance by the Nontraditional Bonds category during both swoon and snapback. Nontraditional bonds is the largest alts category (see Liquid Alternatives: 2019 in Review).

“Overall, the funds beat the S&P 500 for the entire swoon-and-snapback periods, though, of course, the snapback may not be over yet. All the categories we examined outpaced the S&P 500’s nearly 19% loss. None lost more than 11.9%.”

How Calamos Alternatives Worked

Calamos’ alternatives work, as we like to say. So, we took the challenge and measured our equity alts Calamos Hedged Equity Fund (CIHEX) and Calamos Phineus Long/Short Fund (CPLIX) against the Citywire standards and using the same dates for the snapback period. In fact, as short as the time periods are, they help illustrate the differences in what to expect from the two funds.

Performance in the drawdown? See below (also see this post and this post for different looks at Calamos funds’ historical outperformance). CIHEX took part in about half the S&P drawdown and outperformed its peers by more than 400 basis points. CPLIX minimized the downside but underperformed its category peers.

Performance in the snapback? CIHEX slightly underperformed its category average. See how CPLIX comes close to the S&P gain, more than doubling the snapback of its long/short peers.

Finally, here are the alts' performance during the combined swoon/snapback period. While significantly mitigating the drawdown and taking part in the snapback, CIHEX outperformed its peers by more than 400 basis points. The combination of CPLIX downside mitigation and strong rebound produced a return that was twice as good as the Long/Short category average. The Calamos alts worked as designed.

Citywire also considered alts’ performance during the most recent bout of volatility in late 2018. For our full report, see Why Our Alternatives Worked in 2018.

The publication is unimpressed by the alts’ categories longer term (five-year) returns. “None of them have mustered more than a 1% return, and two categories [Managed futures and Multialternative] have posted modest losses,” they write. As you can see in the standardized performance tables below, CIHEX and CPLIX five-year returns both exceed the admittedly low 1% bar.

The analysis closes with the comment that alts’ “saving grace has been their lower volatility over that longer period. While the S&P 500 had 13.7% standard deviation of returns, no liquid alts category had more than 10.3%, and half the categories we examined had 6.2% or less.”

This prompts us to make another point about our funds. While CIHEX five-year standard deviation is 6.64%, investment professionals will note that the CPLIX five-year standard deviation is higher—9.66%.

“This can come up in the due diligence of the fund,” confirms Elise Pondel, CFA, Calamos Product Manager, Strategic Product Management & Analytics. “Remember that standard deviation is a measure of total volatility which includes both upside and downside deviation. CPLIX tends to have periods of large positive returns that increase its standard deviation. Focusing on metrics such as the Sortino ratio, which is a measure of risk-adjusted returns using downside deviation, may be a more useful measure.”

Investment professionals, for more information about our liquid alts, talk to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com. Calamos is the largest alternatives provider as of 3/31/20 based on Morningstar AUM data.