Strategies for Rising Rates and Volatility: Your Move Now

Transcription

1 Strategies for Rising Rates and Volatility: Your Move Now Calamos Market Neutral Income Fund CMNIX The following remarks have been adapted from a March 2018 webcast. ELI PARS, CFA CO-CIO, HEAD OF ALTERNATIVE STRATEGIES & CO-HEAD OF CONVERTIBLE STRATEGIES, AND SENIOR CO-PORTFOLIO MANAGER JASON HILL SENIOR VICE PRESIDENT, CO-PORTFOLIO MANAGER Tim Brand: In the current environment, one question that s top of mind with financial advisors is how to provide stability during periods of market shocks with less exposure to interest rates. More specifically, many advisors are looking for strategies that can maintain risk levels similar to bonds but act differently when interest rates rise. Of course, this is not easy to find, which is why we believe the case for Calamos Market Neutral Income Fund is especially strong. The Fund provides access to one of our core capabilities liquid alternatives, where we are ranked as the sixth largest manager by Morningstar, with experience that goes back many decades.* Launched in 1990, Calamos Market Neutral Fund is one of the first alternative mutual funds. It capitalizes on Calamos experience in the convertible bond space, which extends to the firm s founding in the 1970s. The Fund combines two complementary strategies, convertible arbitrage and covered call writing, seeking to capitalize on market volatility and generate income and risk-managed returns over a full market cycle. In this Q&A, the Fund s portfolio management team Eli Pars, CFA, Jason Hill and David O Donohue discuss their approach and how it may help financial advisors provide a their clients with a degree of insulation from equity market shocks and rising rates. Tim Brand: Alternatives are becoming more mainstream, but they ve been a core focus of Calamos for much longer. Can you tell us more about the team s background and experience? DAVID O DONOHUE SENIOR VICE PRESIDENT, CO-PORTFOLIO MANAGER MODERATOR Eli Pars: As a team, we have a lot of experience in the convertible and option markets and a lot of experience working together. I m on my second tour here at Calamos. I started in the convertible business in 1994 at Calamos, left in 2000 to go work for a couple of hedge funds, rejoined the firm in 2013, and got involved in market neutral in TIM BRAND SENIOR VICE PRESIDENT, HEAD OF U.S. INTERMEDIARY DISTRIBUTION Jason Hill, one of the co-portfolio managers joining me here on the call today has 16 years in the industry and 14 years at Calamos, all of it on market neutral. He brings extensive knowledge of convertible and option markets as well as a long history working on the fund. Also here on the call is David O Donohue, the other co-portfolio managers, and he brings 18 years of experience in the industry, essentially all of it in convert arb and options and three years here at Calamos. David and I have worked together for a long time. Of the 12 or 13 years that I was not at Calamos, David and I were working together. Rounding out the team is our assistant portfolio manager, Jimmy Young, and our analyst, Tony Vecchiolla. Jimmy has 15 years at *Source: Morningstar. Data based on liquid alternative assets under management as of February 28, NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 the firm and four years on the fund, and Tony has been with Calamos for four years. Tim Brand: Can you provide an overview of the environment and discuss the solutions that Market Neutral Income Fund can provide? Eli Pars: Coming into this year, our firm s top down view was bullish on equities. We believed the economy was well positioned for further growth and stocks would participate in that, but there would be more volatility and a backup in rates, as you might expect as we move through the middle innings of the business cycle. What we didn t expect was to see all that happen in the first two months of 2018, but Market Neutral Income Fund has been great for dealing with that kind of market environment. You saw it in the performance both in the up market in January and the downturn in February, and the team will walk through that in a little bit more detail. FIGURE 1. CALAMOS MARKET NEUTRAL INCOME FUND HAS PROVIDED CONSISTENT RETURNS OVER TIME Source: Morningstar. Data since June 2003, the first three year rolling period following the fund s I share inception (5/10/2000). Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. You can obtain performance data current to the most recent month end by visiting As you can see on this chart, the Fund handled volatility well. Throughout its long history, there have only been two rolling three-year periods in negative territory. It s done a great job in terms of not only generating returns but also protecting on the downside in volatile markets. It also has done well in a rising interest rate environment. Over the years, we ve had a lot of interest in the Fund as a replacement for fixed income, particularly as interest rates got lower, and the Fund has performed well over the last few years for those investors. But as you can see in Figure 2, whenever the 10-year Treasury yield rose more than 100 basis points, the Fund has done quite well because we don t have a lot of sensitivity to interest rates either way. So when the bond market is doing well, our performance wasn t really tied to the bond market, and when the bond market does poorly, the same thing comes through. Because the two strategies that we use convertible arbitrage and covered call don t have a lot of interest rate exposure to them, the Fund has the potential to be a nice alternative for the fixed income in a portfolio. 2

3 FIGURE 2. CALAMOS MARKET NEUTRAL INCOME FUND HAS PROVED RESILIENT IN RISING INTEREST RATE ENVIRONMENTS Since its inception, Calamos Market Neutral Income Fund has outperformed the index in every period when the 10-year Treasury yield has increased more than 100 basis points. Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. There is no assurance the Fund will achieve or maintain its investment objective. Source: Morningstar. Rising rate environment periods from troughs to peak for past 20-years, from January 1996 to December Most recent data as of December 31, Average annual total return measures net investment income and capital gain or loss from portfolio investments as an annualized average. In calculating net investment income, all applicable fees and expenses are deducted from the returns. All performance shown assumes reinvestment of dividends and capital gains distributions. Performance shown is for Class A (or equivalent) shares at net asset value and do not take into account any sales loads.performance would have been reduced had such loads been included. The Fund offers multiple other share classes, the performance of which may vary. 100 basis points is equal to one percentage point. The Fund also does a nice job of not only managing volatility but also benefiting from it. As you can see in Figure 3, during periods of high volatility, the Fund provided downside protection versus the S&P 500. The Fund s smaller drawdowns were followed by relatively strong performance, and that s really driven by how we trade both the convert arb and covered call strategies. As we discussed, the Fund hasn t had a lot of correlation to fixed income as shown by the sub-0.20 correlation to the Bloomberg Barclay s U.S. Aggregate Index and broader credit indexes. It does have an equity correlation, particularly on a daily basis, driven by the covered call strategy. However, the correlation decreases a bit when you look at longer periods because our relationship to equities is a little different as FIGURE 3. CALAMOS MARKET NEUTRAL INCOME FUND HAS PROVIDED CONSISTENT RETURNS OVER TIME Source: Morningstar Direct. Past performance is no guarantee of future results, and there is no assurance that the fund will achieve its investment objectives. Current performance may be lower or higher than the performance quoted. 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. Performance reflected at NAV does not include the Fund s maximum front-end sales load of 2.25% had it been included, the Fund s return would have been lower. You can obtain performance data current to the most recent month end by visiting 3

4 time passes, particularly on the convert arb strategy but even on the covered call strategy as well. past few years, which we think has been quite valuable for investors. It s important to understand that while the Fund s equity correlation on a daily basis is high, the overall equity beta is low. Historically, the Fund has had a 0.25 to 0.30 beta to the S&P 500 Index since its inception.* Over the past year or so, we ve been able to lower the beta to the high teens and still generate similar returns to what we ve experienced over the Tim Brand: Can you please discuss the underlying strategies used in the Fund? Jason Hill: We use two complementary strategies a covered call writing strategy and convertible arbitrage. Typically, each one represents 50% of the portfolio +. This FIGURE 4. CALAMOS MARKET NEUTRAL INCOME FUND OFFERS ATTRACTIVE DIVERSIFICATION POTENTIAL» Historically, the correlation between Calamos Market Neutral Income Fund and other asset classes is low.» The Fund may provide expanded diversification within an investor s portfolio. Past performance is no guarantee of future results. Source: Morningstar. Data as of 12/31/17. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Correlation refers to how asset classes perform in relation to one another. Correlation is based on a range of 1 to -1; 1 represents two assets being highly correlated with each other and -1 representing two assets being negatively correlated with each other. Please refer to additional definitions included in this presentation. allocation changes over time based on the opportunity set and market environment. I ll start with the convertible arbitrage side where we re mechanically buying convertible bonds while shorting the underlying stock for the issuer. It is a traditional hedge fund strategy, one of the oldest and first one done in hedge funds. Ours specifically is an unlevered strategy, constructed to be a consistent return generator in any market environment, and it s designed as a true market neutral strategy. To that point, it does have a very low beta, running at a range of zero to 0.1 to the S&P 500 Index over the longerterm. In the convertible arb strategy, we want to build a book of as many asymmetric payoff trades as possible. It is lower risk but has had a really high hit rate. By that, I mean the majority of the trades have had a positive return or a positive expected return. Historically, around 90% of the trades in this book have had a positive total return. So I ll use a baseball analogy we re trying to hit as many singles and doubles as possible, maybe even with some walks. We re not swinging for the fences and we position ourselves to not strike out. We want to stack up these lower risk, high hit rate asymmetric trades. Stacking these trades is how we establish a stable and steady return profile in this strategy. From a risk *As of February 28, 2018, the Fund s A share class has a beta of 0.25 since inception (9/4/1990) and a beta of 0.14 for the 1-year period versus the S&P 500 Index. Beta is a historic measure of a fund s relative volatility, which is one of the measures of risk; a beta of 0.5 reflects 1/2 the market s volatility as represented by the Fund s primary benchmark, while a beta of 2.0 reflects twice the volatility. + As of February 28, 2018, the Fund s strategy allocation was 50%/50%. 4

5 FIGURE 5. COMPLEMENTARY ALTERNATIVE STRATEGIES As complementary strategies, convertible arbitrage and covered call writing together strive to provide a lower-risk profile and attractive returns due to their differing responses to volatility. By combining these strategies, the fund seeks to deliver more consistent returns over a full market cycle. Source: Calamos. There can be no assurance the fund will achieve its investment objective. management standpoint, being sized right in these trades is going to be key for us, not wanting any one position in particular to have a substantial impact on the Fund. Convert arb strategies tend to return 200 to 400 basis points more than LIBOR. There is generally a limit on how much you can return in a given year depending on where rates are. This is where the covered call strategy comes into play and we think it serves as a great complement to convert arb. In simplest terms, the covered call strategy has an equity component and an option portion. We use a basket of S&P stocks for the equity bucket, along with SPX options to construct the hedge and generate income. It has been higher beta, historically around 0.5 the S&P 500 Index. We like to say that it has a little higher octane than the convert arb side, but it is still hedged. However, it s important to understand how we get there. It s not just long equities and short calls. We use a long-leaning collar SPX option position against the long basket of S&P stocks. The collar part essentially means short calls and long puts. Long leaning means we re not capping our upside with short calls. We do have equity upside participation. Our model or base trade that we use as a compass or reference point is around an 80% notional call write, while we re concurrently buying 40% to 50% notional put protection for the downside and those are both around 30 to 60 days out. Positioning like this with near-the-money options allows us on average to generate about 100 to 200 basis points of income with a beta range around 0.40 to That said, we don t always look exactly like our model trade. It is our job to actively construct a hedge where we can participate in as much as possible on the upside and to provide as much protection as we can on the downside. In this dynamic market, that s not going to always be the same trade. As far as the equity book goes, we own about A collar is a protective options strategy created by purchasing a put option while concurrently writing a call option. A long-leaning collar entails selling more calls than buying puts. Alpha is the measurement of performance on a risk-adjusted basis. A positive alpha shows that performance of a portfolio was higher than expected given the risk. A negative alpha shows that the performance was less than expected, given the risk. Moneyness refers to the intrinsic value of an option in its present state. It is a description of a derivative relating the price of its underlying asset to its strike price. A call or put option is out of moneyness when it is a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. 5

6 250 to 270 names to replicate and optimize the S&P. We re trying to add small amounts of alpha here, but really our main objective is to maintain a lower tracking error while having a high correlation to the S&P since we are using S&P options against our equities. You won t find any large factor bets or sector/industry bets on the equity side, but we do have a natural bias to larger-cap names because of the amount of names we own. However, we do attempt to mitigate and manage the large-cap bias through the optimization of the bottom portion of the index, the smaller cap names in the S&P, which are about 280 names with a weighting of 10 basis points or less. Tim Brand: How has the Fund done this year as bonds have sold off? David O Donohue: We like to describe the Fund as a lower volatility product that can also protect capital during market sell-offs. It is also a product that can you give a fixed income-like return stream, even during periods of rising rates. In this most recent period where we had rising rates, a falling equity market and the return of volatility, the Fund held up well and performed well, as you can see in the next slides. Normally, when you think about rising volatility, you d expect us to have strong performance in the convertible arbitrage side of the Fund. Convert arb is a volatility-aided strategy, and if we find ourselves in a more normal volatility regime, or even a high-volatility regime going forward, we believe the convert arb strategy will perform very well. However, our recent strong performance was driven more by how we structured our hedge in the covered call strategy, rather than the convert arb strategy. This was because we stayed true to one of the core principles of the Fund. We try to always take advantage of the opportunities the market presents and not the ones we hoped it would present. When we look back on a given period in a year, two years, or three years from now, what will we look back and say that was a unique opportunity we had at that time. During the past year or two, there was a clear defining attribute low volatility. We had a period of historically low realized volatility, and we also had a period with historically low implied volatility on index options. Anytime we think about things in historic context and at historic levels, we like to think that often there s a corresponding opportunity there. For a hedge strategy like ours, the opportunity the market was giving us was fairly clear. The low vol allowed us to construct a hedge that had meaningful downside protection but capped less of the upside than we normally have to. For the most part, the structure of our covered call strategy is going to be fairly constant. We target approximately 40% or more notional protection to give real downside protection if things get ugly. We ll normally target a beta in the 0.40 to 0.60 range. How we get to that range is going to depend on the opportunities that we see at the time. There will be times when selling calls is attractive and times when buying puts is attractive. There will be times when one or both of those are just not very opportunistic. So, we take a step back and evaluate how can we take advantage of the current environment to construct a more effective hedge. As a result of the really low volatility, the normal trade that Jason described begins to look a little less appealing. We don t get a lot of bang for the buck out of selling those out-of-the-money calls. On the flipside though, it s more attractive for us to get protection through puts. We can buy more puts and closer-to-the-money puts. Because skew is still relatively steep, we could even add more protection through what we feel are attractive put spreads. Because of the lower dollar price and low cost of those outof-the-money calls, we didn t believe it was justified to cap as much of our upside. As a result, we shifted from simply selling those calls to selling slightly lower call spreads. The upside of that is we began to gain back market exposure above the upper strike of that call spread. The downside is we re going to take in less income. Normally, we aim to take 6

7 FIGURE 6. CALAMOS MARKET NEUTRAL INCOME FUND HAS OUTPERFORMED THE S&P 500 DURING ALL DOWN MARKETS SINCE INCEPTION Calamos Market Neutral Income Fund class I share returns for 1-year, 3-year, 5-year, 10-year and since inception (5/10/00) periods as of 1/31/18 are 5.62%, 4.46%, 3.90%, 3.60% and 4.63%, respectively. S&P 500 Index returns for 1-year, 3-year, 5-year, 10-year and since Fund inception (5/10/00) periods as of 1/31/18 are 26.41%, 14.66%, 15.91%, 9.78% and 6.03%, respectively. Past performance is no guarantee of future results. Please see additional performance information included or visit for standardized performance. in 1% to 2% in income from the net premiums of our option hedge. That s just tougher to do in that low vol environment. We decided that given the market opportunity, we were willing to forego some or even most of that income in a truly standstill market. In exchange, we were going to get much better participation if the market moved really in either direction. Foregoing some income to buy extra puts and to keep more upside allowed us to have a nice smile profile. If the market had a larger move in either direction, we could have a better participation than we would expect out of our normal profile. We believe giving up a little bit of that standstill yield in exchange for better participation on either tail was a good tradeoff for a Fund like ours. If you think back to the end of last year and even the beginning of this year, we saw a nice market rally. The decision to not blindly sell those lower priced calls benefited the Fund. We got through the upper strike on our call spreads, and we began to gain back market exposure as we rallied. In contrast, I think a lot of our competitors with more rigid hedging philosophies probably became quickly capped and had minimal exposure to that rally. Everyone wants extra returns and one of the things we like about the covered call strategy is the ability to capture some of that extra market upside. I think it is always important for us to remember what our mandate is and why investors use our Fund in an allocation. As the market rallied and we gained back market exposure, we stayed disciplined and continued to monetize that exposure. We took in some of those profits to replace the income we had forgone, but we were also able to add more puts and even roll up some of the Fund s puts to be closer to the money. As the market rose, we earned a positive return and added more downside protection because we had that return coming in. This left us in a great spot when the market eventually turned, and we headed into the selloff well 7

8 FIGURE 7. CALAMOS MARKET NEUTRAL INCOME FUND HAS CAPITALIZED ON RECENT MARKET VOLATILITY YEAR-TO-DATE TOTAL RETURN % Past performance is no guarantee of future results. Please see additional performance information included or visit for standardized performance. protected ready for an increase in vol. This allowed us to continue to manage the Fund from a position of strength. doesn t have to. It depends on the nature of the hedge we have on at the time. Once again, it wasn t a call in either direction on the market. We simply took advantage of that low vol opportunity to construct a better hedge for our Fund. We believe our approach sets us apart from some of our competitors that might be more rigid. While they may benefit in complacent periods like last year, we have a tendency to perform well and even outperform in more volatile periods. I would argue those volatile periods are the periods investors have funds like ours for. Tim Brand: Are there circumstances where the Fund does not do well? Eli Pars: There are environments where we re more likely to have negative P&L and really it comes in two areas. First, due to the beta of the Fund (which for the most part comes from the covered call side), an equity market sell-off can lead to a downturn in the Fund. Although as David pointed out, it The second area is convert markets softening was the extreme scenario for that, but I d also point to the early 2000s as another example where we had more of an equity valuation driven sell-off in the market while convert arb was up. During this period, Market Neutral Income Fund was only convert arb and it had great relative performance it was up meaningfully while the equity market was down. Tim Brand: What are the components of the income stream of the Fund? Eli Pars: It s helpful to think of income in terms of the two sides of the Fund. On the convert arb side, we typically have coupons of about a 1.5% to 2%. You can get another 50 basis points in rebate from the short positions. The rest of the return of the Fund tends to come from either gamma trading where we re rebalancing our hedge, buying low and selling high mechanically or richening of the book. 8

9 While those last two tend to be more capital gains oriented than income, as you think of it normally, they re not necessarily tied to an up equity market. Often when investors look at returns and try to break out income versus capital gains, it s with the assumption that you need equity market appreciation to get capital gains. Delta is how much the convertible value rises or falls for a given stock move. Gamma is the change in delta as stock price moves. Market volatility can provide opportunities to profit through what is referred to as gamma trading. You don t really need that in a convert arb strategy. We can generate gamma trading profits just as easily in a down market as we can in an up market, sometimes better if you look at the example of the early 2000s equity market selloff. On the covered call side, you ve got the dividend stream from the underlying equities. You ve got net premium from options we sold net of what we bought. As David pointed out, that recently hasn t been as big a driver of income for us, but most times it is. Also, we can generate gains from the option portfolio in a down market just as easily in an up market. Tim Brand: How might your top-down view influence how the Fund is positioned? Eli Pars: There s really not a lot of macro driven direction in how we position the Fund. Convert arb is very positionby-position bottom up. In covered call, we re trying to make sure we have a hedge in place. We spend our time trying to construct a hedge in the best way possible. We ve had people ask us if our view on volatility shapes how we trade the Fund. I believe our understanding of where volatility is traded historically shapes the Fund, but we re not making calls on vol being high or low. That said, we do realize what is relatively low absolute volatility or relatively high, and that may frame how we adjust our hedge or tweak it. But it s more a focus of what s going on in the market right then rather than the market s move versus our view. Tim Brand: What would happen if spreads between corporate bonds and Treasury bonds tighten? How would that impact the Fund? Eli Pars: It s a net positive. We do have a bit of residual credit spread risk or exposure I would say in the convert arb piece. As Jason mentioned, the convert arb side is really asymmetric profiles and lower risk options. It s not a real credit-oriented strategy or cap structure-oriented strategy. We don t have a lot of exposure there. So it shouldn t have a ton of impact on the Fund. If spreads do tighten that is a small positive to the Fund. Tim Brand: What is the capacity for the Fund? Eli Pars: Capacity isn t a gating factor right now. The S&P equity and option market is extremely deep and so the covered call side really doesn t have any issues. The convertible side is where we could theoretically have a potential constraint factor, but we don t see that as an issue now. We have a healthy convertible market now. We saw good issuance in January and February and a couple deals already here in the first day of March. A potential asset allocation solution Tim Brand: There are two ways to think about using the Fund in an asset allocation. The first would be to carve out a piece of fixed income. As Eli discussed, the Fund would be beneficial as a diversifier for fixed income, particularly during periods of rising interest rates (Figure 2). More specifically, the Fund could be used as a replacement for short/ intermediate bonds based on historically similar volatility levels. Delta is how much the convertible value rises or falls for a given stock move. Gamma is the change in delta as stock price moves. Market volatility can provide opportunities to profit through what is referred to as gamma trading. 9

10 Because the Fund is designed to provide stability during market shocks, it could also be used as a stabilizer for an entire portfolio. As we discussed (Figure 6), since the Fund s inception in 1990, it has outperformed the S&P 500 during every period when the index was down more than 5%. In this allocation scenario, proceeds could be deployed from both bond and equity positions. In closing, we ve discussed some of the potential hurdles that investors face in meeting their investment objectives: Rates could rise, equity prices could fall, and volatility could produce drawdowns. That s why we believe now could be a perfect time to add Calamos Market Neutral income Fund to your clients allocations. By combining covered call writing and convertible arbitrage, the Fund seeks to deliver more consistent returns over a full market cycle. We believe the Fund s innovative approach, it s track record of more than 25 years and a management fee of under 100 basis combine to provide a very attractive solution for investors. If you d like to know more about the Fund, we encourage you to visit our website, Calamos.com or you can contact a Calamos investment consultant at OUR PRESENTERS PREPARE FOR THE LIVE, SPECIAL EVENT WEBCAST. 10

11 CALAMOS MARKET NEUTRAL INCOME FUND: INFORMATION CALAMOS MARKET NEUTRAL INCOME FUND: PERFORMANCE AS OF 12/31/2017 The Bloomberg Barclays U.S. Government/Credit Index and Citigroup 30-Day T-Bill Index return Since A share Inception start date is 8/31/90. The Bloomberg Barclays U.S. Government/Credit Index, Citigroup 30-Day T-Bill Index, and Morningstar Category return Since I share Inception start date is 4/30/00. Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. 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. Performance reflected at NAV does not include the Fund s maximum front-end sales load of 2.25%.Had it been included, the Fund s return would have been lower. For the most recent month-end fund performance information visit Class I shares are offered primarily for direct investment by investors through certain tax-exempt retirement plans (including 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans, defined benefit plans and non qualified deferred compensation plans) and by institutional clients, provided such plans or clients have assets of at least $1 million. Class I shares may also be offered to certain other entities or programs, including, but not limited to, investment companies, under certain circumstances. The gross expense ratios as of the prospectus dated 2/28/18 are 1.28% for A shares and 1.02% for I shares. Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. A Shares at NAV returns do not include the fund s maximum 2.25% front-end sales load, had it been included returns would have been lower. You can obtain performance data current to the most recent month end by visiting Returns greater than 12 months are annualized. Annualized total return measures net investment income and capital gain or loss from portfolio investments as an annualized average assuming reinvestment of dividends and capital gains distributions. Portfolios are managed according to their respective strategies which may differ significantly in terms of security holdings, industry weightings, and asset allocation from those of the benchmark(s). Portfolio performance, characteristics and volatility may differ from the benchmark(s) shown. Source: State Street Corporation and Mellon Analytical Solutions, LLC. 11

12 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. The opinions and views of third parties do not represent the opinions or views of Calamos Investments LLC. Opinions referenced are as of March 1, 2018 and 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. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect any fees, expenses or sales charges. Investors cannot invest directly in an index. The Citigroup 30-Day Treasury Bill Index is an unmanaged index generally considered representative of the performance of short-term money market instruments. U.S. Treasury Bills are backed by the full faith and credit of the U.S. government and offer a guarantee as to the repayment of principal and interest at maturity. The Bloomberg Barclays U.S. Government/Credit Bond Index is composed of long-term government and investment-grade corporate debt securities and is generally considered representative of the performance of the broad U.S. bond market. The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index comprised of U.S. investment grade, fixed rate bond market securities, including government, government agency, corporate and mortgage-backed securities between one and ten years to maturity. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock s weight in the index proportionate to its market value. The 500 is one of the most widely used benchmarks of U.S. equity performance. The MSCI EAFE Index is an arithmetic, market value-weighted average of the performance of securities listed on the stock exchanges of selected countries in Europe, the Far East and Australia. The index is calculated on a total return basis, which includes reinvestment of gross dividends before deduction of withholding taxes. The Credit Suisse U.S. High Yield Index consists of US-denominated high yield issues of developed countries. Issues held in the index must be publicly registered in the U.S. or issued under Rule 144A with registration rights, must be rated BB or lower, and the minimum amount outstanding (par value) must be at least $75 million. The FTSE NAREIT All Equity REITs Index measures the performance of all publicly traded equity real estate investment trusts traded on U.S. exchanges. Skewness describes asymmetry of returns from the normal distribution. CBOE Volatility Index (VIX) measures market expectations of near term volatility conveyed by stock index option prices. London Interbank Offered Rate (LIBOR) is the rate at which many leading banks globally offer to participating banks for short-term loans. Tracking error is a measure of the volatility of excess returns relative to a benchmark. An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund s prospectus. 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. The principal risks of investing in the Hedged Equity Income Fund include: covered call writing, options, equity securities, correlation, mid-sized company, short sale, interest rate, credit, liquidity, portfolio selection, portfolio turnover, foreign securities, American depository receipts, and REITS. Convertible Arbitrage Principal Risks: Convertible Securities Risk- The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security s investment value. Convertible Hedging Risk- If the market price of the underlying common stock increases above the conversion price on a convertible security, the price of the convertible security will increase. The fund s increased liability on any outstanding short position would, in whole or in part, reduce this gain. Covered Call Writing Principal Risks: As the writer of a covered call option on a security, the fund foregoes, during the option s life, the opportunity to profit from increases in the market value of the security, covering the call option above the sum of the premium and the exercise price of the call. Short Sale Risk: The Fund may incur a loss (without limit) as a result of a short sale if the market value of the borrowed security increases between the date of the short sale and the date the Fund replaces the security. The Fund may be unable to repurchase the borrowed security at a particular time or at an acceptable price. 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 or call Read it carefully before investing. Calamos Financial Services LLC 2020 Calamos Court Naperville, IL caminfo@calamos.com 2018 Calamos Investments LLC. All Rights Reserved. Calamos and Calamos Investments are registered trademarks of Calamos Investments LLC. MNISRVCOM O C