On the Job Every Day the Market Is Open: CIHEX Is Actively Managed to Optimize Volatility

There’s plenty of work left to do for the actively managed hedged equity fund this year—both to position for what may be more upside and to build in strategies designed to blunt potential downside risk. While other strategies’ set-it-and-forget-it approach may be on autopilot through year-end, the Calamos Hedged Equity Fund (CIHEX) is being managed to make the most of multiple possible scenarios, as recently detailed by Calamos Vice President and Portfolio Specialist Joseph Cusick.

Investors appear to be complacent with the VIX right around 16—compared to a median of 18.5 over the last 20 years. “Hitting all-time highs isn’t that difficult. It takes just a quarter of a percent move in most of these markets, and all of a sudden, we have all-time highs,” he said.

The CIHEX team is looking for where risk is being priced going into the end of the year and Q1 2022, where volatility in the mid-20s is anticipated. “While the team believes that realized or actual volatility should stay in the more normalized range, we’re seeing that the VIX complex is pricing out the ability to have more volatility into the first quarter,” said Cusick.

He also touched on the SKEW Index. “The SKEW Index is where you look at the front month, out-of-the-money puts. These are the puts that are commonly referred to as tail risk puts. These are two, three, four standard deviations out of the money, and the SKEW Index tells us if those are relatively cheaply priced or if they’re getting more expensive. And we can see right now, with a 148 SKEW as shown below, the index is up in the highest part of the range that we’ve seen since the inception of the index.”

The environment, according to Cusick, presents an opportunity to use different strategies to optimize downside risk. “Where out-of-the-money puts are expensive, we’re using put spreads. We’re buying puts that are closer to where the market’s trading, and we’re trying to take advantage of that increased implied volatility in the left tail and selling those out-of-the-money puts, which helps with deferring the cost of the long puts.”

Cusick cites the strategy as an example of using volatility to optimize and be opportunistic by putting on what the team believes are more favorable hedges. This also provides the fund the ability to participate more on the upside. The S&P 500 has surprised many by climbing to 4700, and there may be more to come this year. By contrast, a strategy capped at a lower level is shut out from further participation.

The team is managing CIHEX to be long-leaning, seeking its 60% capture guardrail. At the same time, they're actively building in controls that seek to limit the downside to 40%.

This is a crucial difference between CIHEX and other strategies. “Why would you accept a capped upside with a defined downside? Why wouldn’t you want to capitalize on opportunities when the market moves up or down?” Cusick asks.

His point: The CIHEX team continues to manage in pursuit of a positive outcome every day the market is open—and in fact, it’s times like these when the fund has outperformed passive strategies. Investment professionals particularly value this for clients getting into the fund in the last few months of the year.

For an update on the volatility markets, contact your Calamos Investment Consultant at 888-571-2567 or email caminfo@calamos.com to schedule a 10-minute briefing with Cusick. Cusick joined Calamos after serving as the Director of Institutional Education and Business Development for The Options Industry Council (OIC) and is available to meet with small groups of investment professionals.