CMNIX: Steady Performance Through Shifting Terrain

Jason Hill

Summary Points:

• Calamos Market Neutral Income Fund (CMNIX) continued to demonstrate its value as a fixed-income alternative, delivering steady returns with reduced interest-rate sensitivity during a quarter marked by Fed policy shifts and market uncertainty.
• The fund’s limited duration exposure supported strong performance throughout the quarter, delivering returns comparable to fixed-income indexes. The fund rose 2.0%, in line with returns of 1.9% and 2.0% for the Bloomberg US Government/Credit Index and the Bloomberg US Aggregate Bond Index, respectively.
• We capitalized on robust convertible bond issuance and continued market volatility by expanding our convertible arbitrage allocation and adding tactical downside protection to our hedged equity positioning.

In contrast to the second quarter, when markets fought through a dramatic selloff following “Liberation Day” tariff announcements to claw their way to new highs, the third quarter was less volatile. Investor sentiment was more upbeat as Fed easing came into focus and data pointed to continued economic resilience.

The Fed delivered its first rate cut in September, lowering rates by 0.25% with additional cuts projected for the remainder of the year. This policy pivot, driven largely by softening labor market data, has not prompted us to change our approach.

Interestingly, broad index volatility remained flat and historically on the lower side for the quarter, yet single-name volatility persisted. This environment of calm markets with active individual stock movement provided ideal conditions for the fund’s strategies, particularly in convertible arbitrage, where the fund benefits from company-specific price action without broad market disruption.

CMNIX performed well during the quarter, delivering returns consistent with traditional fixed income while maintaining the reduced volatility and interest-rate risk that investors seek from bond alternatives. The strategy’s steady performance contrasted favorably with the more unpredictable moves in traditional bond markets as yields fluctuated around Fed communications and economic data.

The Case for CMNIX: Outperforming Bonds over the Long Term

Data as of 09/30/25. 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.

All four sleeves of the fund (hedged equity, convertible arbitrage, special purpose acquisition company (SPAC) arbitrage, and merger arbitrage) posted positive performance over the three quarters of the year. Our convertible arbitrage book and hedged equity strategy had similar gross returns in the third quarter, although the ride in the hedged equity sleeve was a bit bumpier.

How We Are Positioned

We believe one of the fund’s key advantages is our flexibility to adjust our allocations on an ongoing basis, versus funds with more static rebalancing strategies. That said, the most significant change during the quarter was an increased allocation to convertible arbitrage, funded by a modest reduction in the hedged equity sleeve. This reallocation reflected the extraordinary new issuance environment that has developed over the first three quarters of the year.

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 limit downside exposure. Our hedged equity allocation decreased modestly as we redirected capital toward convertible opportunities, but we simultaneously enhanced our defensive positioning with the addition of long puts out to year-end and continued to opportunistically layer in risk-reducing put spreads, maintaining downside risk mitigation while preserving modest upside participation.

The hedge remains toward the more defensive end of its historical range, reflecting the current opportunity set and our view that while markets may continue higher, there are potential volatility catalysts ahead.

Arbitrage. Convertible arbitrage is the core allocation of CMNIX’s arbitrage sleeve, with opportunistic allocations to other strategies, such as merger arbitrage and SPAC arbitrage.

We increased the fund’s convertible arbitrage weighting during the quarter, driven by exceptional new issuance opportunities. The US convertible market saw over $33 billion in new deals during the third quarter—a dramatic increase from the roughly $10 billion issued in the third quarter of 2024. For the year-to-date, US convertible issuance is on a pace to beat 2001’s record issuance of $106 billion. Global year-to-date issuance has already surpassed full-year issuance for 2024 and is also in striking distance of 2020 and 2021. This increased issuance expands the opportunity set and has refreshed the convertible market, providing opportunities for pricing arbitrage as issuers compete for investor dollars.

Equally important, the secondary convertible market demonstrated remarkable health, easily absorbing this heavy new supply without pressure on existing paper. This ability to digest substantial new issuance while maintaining market stability signals a robust, liquid convertible ecosystem—precisely the conditions that support our core strategy.

Given our expectation of continued global economic growth and increased clarity around policy in the US, we expect to see more companies access the convertible market to fund growth or refinance existing debt. Even if interest rates continue to come down, we believe the current environment incentivizes issuers to contain borrowing costs by choosing convertibles over nonconvertible debt. And while not a lock by any means, we’re not ruling out a “green swan” burst of new convertible issuance in the coming years.

Global Convertible Issuance is Surging ($ bil)

Source: ICE BofA Global Research. Data through September 30, 2025.

Merger arbitrage and SPAC arbitrage are highly idiosyncratic strategies, and our allocations to both have held steady over the quarter and since the start of the year. In the coming months, we expect the Trump administration will focus more attention on lowering regulatory hurdles, which could lead to more opportunities in merger arbitrage.

Meanwhile, we have seen an uptick in SPAC new issuance, albeit off a very low base. Although we have been active in these deals, this activity hasn’t materially increased the fund’s overall level of SPAC exposure.

Conclusion

The third quarter reinforced our conviction that CMNIX serves its intended role as a bond alternative capable of generating steady returns across varying market conditions. Our tactical approach allowed us to capitalize on exceptional convertible market conditions while the hedged equity book helped maintain the defensive characteristics that define our strategy.

Looking ahead, with the S&P 500 Index near all-time highs and additional Fed rate cuts anticipated, we see multiple potential volatility catalysts that could create opportunities for our strategy. Whether from concerns about excessive AI spending, ongoing geopolitical tensions, or evolving tariff policies, more uncertainty likely lies ahead. We believe our dual-core strategy approach (arbitrage and hedged equity) and flexible positioning will continue to serve investors well in this environment. The convertible market’s demonstrated ability to handle heavy issuance while maintaining healthy secondary trading, paired with our defensively positioned hedged equity strategy, positions us well for whatever the final quarter may bring.