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Correlation Measures Direction Only—Why That Matters When Evaluating CMNIX as a Diversifier
June 25, 2018
The following post was written by R. Scott Henderson, CFA, CIMA®, CMFC, Calamos Senior Vice President, Portfolio Specialist
One question occasionally asked about Calamos Market Neutral Income Fund (CMNIX) centers on the correlation that the fund has historically had relative to the S&P 500 Index. Since its September 1990 inception, the Market Neutral Income Fund has had a 0.74 correlation to the S&P 500.
The question: What’s the risk that, when markets correct, CMNIX will move in a similar direction to equities—and not provide adequate diversification when it is most needed? This quick post addresses that concern.
Correlation is a statistic that measures the degree to which two assets will move in relation to one another. A correlation of 1.0 implies that the two securities always move in the same direction while a correlation of -1.0 implies that they always move in opposite direction.
Correlation doesn’t measure magnitude and skew.
It is important to remember, however, that correlation measures direction only.
Correlation doesn’t measure magnitude and skew. This is an important nuance in that two assets may have an asymmetric relationship as one security may participate in greater upside performance than downside.
A first-quarter performance comparison shows that correlation does not tell the entire story: While the fund had a 0.60 daily correlation to the S&P 500, CMNIX was up 1.34% while the S&P 500 was down 0.76%.
Over the 18-year history of the I share class—a period that included both the Internet Bubble Crash when the S&P was down 19.90% and the Financial Crisis when the S&P was down 41.39%—CMNIX has had only two rolling three-year periods in negative territory. Of those two, the deepest decline was in 2009, when the return was 2%. Also see this post.
Financial advisors, for more information about CMNIX, please talk to your Calamos Investment Consultant. Call 888-571-2567 or email [email protected].
Calamos ranks sixth on the list of alternative fund managers by assets under management in the Morningstar Alternatives Category as of 3/31/18.
Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-800-582-6959. Read it carefully before investing.
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. Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
Alternative investments are not suitable for all investors.
The principal risks of investing in the 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.
Skew is the difference in implied volatility between out-of-the-money options, at-the-money options, and in-the-money options.
S&P 500 Index is generally considered representative of the U.S. stock market.
Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
Citigroup 30-Day T-Bill Index is generally considered representative of the performance of short-term money market instruments.
Bloomberg Barclays U.S. Government/Credit Index comprises long-term government and investment grade corporate debt securities and is generally considered representative of the performance of the broad U.S. bond market. Unlike convertible bonds, U.S. Treasury bills are backed by the full faith and credit of the U.S. government and offer a guarantee as to the timely repayment of principal and interest.
Morningstar Market Neutral Category represents funds that attempt to eliminate the risks of the market by holding 50% of assets in long positions in stocks and 50% of assets in short positions.