Staying Opportunistic with Convert Arb, Hedged Equity Positioned CMNIX for Rally Back
In a turbulent period for the markets, Calamos has been hosting a Calamos CIO Conference Call series for investment professionals.
Below are notes from a call Wednesday, April 29, with Eli Pars, CFA, Co-CIO, Head of Alternative Strategies and Co-Head of Convertible Strategies, Senior Co-Portfolio Manager, and Jason Hill, Senior Vice President, Co-Portfolio Manager. To listen to the call in its entirety, go to https://www.calamos.com/CIOmarketneutral-4-29
For highlights on last month's calls, see this post.
The dual strategies of convertible arbitrage and hedged equity helped Calamos Market Neutral Income Fund (CMNIX) weather the recent drawdown while being positioned for future opportunities.
“We’re never happy with a negative number, but the fund held up quite well, given the magnitude of the drawdown. And,” Pars noted, “it’s participated in the recovery and rally back.”
During the drawdown, convert arb behaved largely as it has in previous drawdowns, although Pars noted that forced selling didn’t occur to the extent it has previously. However, there was some price discovery, which the fund was able to take advantage of. While convert arb was flat to slightly down, that created significant embedded value, which the fund began to realize as the market recovered.
Pars also commented on the issuance market, where issuance is 60% higher year over year. Convertibles are being issued by more household names than have been seen recently, including Carnival, Booking.com, Priceline, Southwest Airlines and well known retailers.
The hedged equity book has also added value by participating in the market’s bounce back. The focus there, according to Pars, is to keep the risk profile in line. Selling calls has been more lucrative but puts continue to be expensive. During the market’s rally, the team continues to add puts, whose objective is potential downside risk mitigation.
Within the Beta Range
The PMs acknowledged the challenges of the unprecedented volatility, which included the VIX peaking above 80 on March 16. Even so, the participation in the drawdown on those days was still in range with the fund’s longer term beta range of 10 to 30.
March 16 and March 12 were the worst days of the drawdown, and they were the third and sixth worst days, on a percentage basis, in the history of the S&P 500. They led to a rare down quarter for CMNIX.