CMNIX: An Opportunity for Ballast in Turbulent Markets

Eli Pars, CFA

Key Points:

• Over interest rate and market cycles, we believe Calamos Market Neutral Income Fund has shown its value as a fixed-income alternative, providing a return stream that aligns with what investors seek from bonds.
• Our strategy has little duration opportunity or risk, which has allowed the fund to advance over short- and longer-term periods while traditional bonds have yielded less predictable results.
• During the quarter, we took advantage of volatility and increased the fund’s allocation to our hedged equity strategy at the margin.

During the first quarter, markets once again took investors on a roller coaster ride. The market’s anticipation of business- and market-friendly policies (e.g., lower taxes and less regulation) gave way to anxiety about the impact of tariffs on inflation, consumer activity, and economic growth. The S&P 500 fought back from a 10% peak-to-trough decline but still finished down more than 4% on the quarter, with a significant rotation away from tech stocks. After a disappointing 4Q loss and a lackluster 2024, the bond market made its way back into investors’ good graces, benefiting from the market’s flight to areas of the market with perceived safety.

Through it all, Calamos Market Neutral Income Fund continued to deliver on our aim of providing steady gains, regardless of the market’s direction. Our approach—combining an arbitrage sleeve and hedged equity sleeve—has little exposure to interest rate opportunity or risk. During the quarter, this resulted in the fund’s advance trailing traditional bonds slightly, but over time, our approach has delivered a better—and more consistent—historical return experience than traditional fixed income.

The Case for CMNIX

The Appeal of the “Middle Road”: CMNIX Versus Stocks and Bonds

Data as of 03/31/25. 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. All performance shown assumes reinvestment of dividends and capital gains distributions. The fund’s gross expense ratio as of the prospectus dated 2/28/2025 is 0.97% for Class I shares.

How We Are Positioned

Our strategy gives us the flexibility to adjust our allocation on an ongoing basis. Especially in fast-moving markets, we believe this gives Calamos Market Neutral Income Fund an edge over funds with more static rebalancing strategies. Throughout the quarter, we took advantage of volatility and were active in booking profits and rebalancing our hedges. Our hedged equity allocation crept up at the margin. Both our convertible arbitrage and hedged equity strategy contributed positively to performance, with the former leading.

CMNIX Allocation

Numbers may not total 100% due to rounding.

Hedged Equity. This sleeve is positioned to provide upside participation in the equity market, while seeking to significantly limit downside exposure. The volatility of the first quarter gave us opportunities to lock in an attractive spread between the calls we were writing and the put spreads we created; overall, our hedge remains toward the more defensive end of its long-term historical range, although slightly less defensive than at points in recent quarters.

Arbitrage. Our arbitrage sleeve is built around a core allocation to convertible arbitrage, with opportunistic allocations to other strategies, such as merger arbitrage and SPAC arbitrage. Although the fund’s allocation to convertible arbitrage decreased marginally during the period, our outlook remains constructive.

The first quarter saw brisk new issuance, with companies bringing nearly $23 billion in new issuance to market globally, with structures that were attractive on the whole. Looking forward, although issuance could be tempered if equity markets stay volatile, the interest-rate environment continues to incentivize issuers to choose convertibles over nonconvertible debt to contain borrowing costs.

Global Convertible Issuance: Healthy Year-to-Date Levels ($bil)

Source: ICE BofA Global Research. Data through March 31, 2024.

Our allocations to merger arbitrage and special purpose acquisition company (SPAC) arbitrage held steady over the quarter. Both are highly idiosyncratic strategies. We expect to see the Trump administration turn more attention to lowering regulatory burdens in the coming months, which could boost the opportunity set in merger arbitrage.

Outlook

The magnitude and reach of President Trump’s April 2 tariff announcement took markets by surprise, and we’re seeing a violent reaction in the immediate wake. However, since Trump 2.0 began, we’ve seen that nothing is set in stone when it comes to tariffs. And while it’s hard today to look past tariffs and the potential “worse-case” impacts on the markets and economy, other areas of Trump’s policy agenda could provide some countervailing tailwinds.

No doubt, there will be a lot of twists and turns, which we believe play to our strengths and the potential opportunity of Calamos Market Neutral Income Fund. One of our bedrock principles is that we can’t predict what will happen in the markets, so we need to position the fund for as many outcomes as possible. To us, this seems like an especially good approach in the current environment.