Navigating Complacency: How CIHEX Protects Portfolios as Markets Ignore Tariff Risks

Navigating Complacency: How CIHEX Protects Portfolios as Markets Ignore Tariff Risks

Despite significant headlines about new or potential tariff policies-particularly those driven by the current administration's "America First" agenda-markets have at times appeared surprisingly resilient and, in some cases, have rebounded sharply after initial declines. Several factors we believe help explain this behavior:

• Markets "Discount the Worst, Then React to Nuance": Historically, markets often price in worst-case scenarios quickly, then reassess risks as details emerge. For example, following steep initial reactions to tariff announcements, the S&P 500 and other indices have frequently staged "V-shaped" recoveries once clarity improves or as the odds of the most extreme reciprocal actions (e.g., full-scale trade wars) appears unlikely.
• Policy Uncertainty Is Not New-And Is Now Met with Flexibility: Investors have witnessed multiple rounds of trade threats, negotiations, and partial rollbacks over recent years. This cyclical pattern has made participants somewhat "numb" to tariff talk and more adaptive in how they interpret risks over shorter time frames. Additionally, markets are now keenly focused on other policy factors (e.g., tax policy, deregulation, Fed moves) that may counterbalance tariff-induced headwinds.
• Global Rotation Diminishes US Tariff Shock: As US policies become more targeted toward domestic manufacturing and away from multinational mega-caps, global capital has started rotating toward overseas opportunities. A materially weaker US dollar, alongside stimulative policies in Europe and China, is driving investment away from US risk assets and into non-US equities, muting the impact of US tariffs on global risk appetite.
• Companies and Investors Are Adjusting Supply Chains: The current market climate rewards adaptability. Many companies have diversified supply chains or are using the 90-day tariff pauses to recalibrate, reducing the expected downside from tariffs.
• Unlikely Implementation of Most Extreme Tariffs: The market is betting that only a subset of the harshest tariffs (China excepted) will go into effect, with room for negotiation or phased rollouts. This expectation leaves space for volatility but limits fears of a lasting market shock.

Why the Calamos Hedged Equity Fund (CIHEX) May Make Sense in This Environment

CIHEX is especially relevant when markets are navigating headline risk, macro uncertainty, and potential for episodic shocks, such as those stemming from tariff policy changes. Here's why:

• Asymmetric Risk/Reward Structure: CIHEX aims to deliver a pre-defined ratio of equity market participation to downside risk, recently seeking about 65% of the upside with only 35% of the downside. This approach has demonstrated strong capital preservation in periods of market stress, e.g., during sharp tariff-driven drawdowns in Q1 2025.
• Dynamic, Active Hedging: Unlike static "set-and-forget" strategies, CIHEX employs an actively managed options overlay. This allows the fund to nimbly increase protection or seek opportunities as policy and volatility shift, whereas systematic strategies might be stuck with suboptimal hedges until their next reset.
• Historically Reduced Volatility and Fast Recovery: CIHEX has consistently demonstrated lower beta (volatility) than broad market indices, alongside shallower drawdowns and quicker rebounds, per recent performance metrics and Morningstar ratings.
• Tactical Flexibility During Episodic Volatility: The fund's team can implement subtle shifts-such as layering in new puts or tactically adjusting hedges-to monetize market volatility caused by shifting policy headlines. This flexibility is critical in environments where shocks (like unexpected tariff announcements) can spike volatility quickly and then recede.
• Portfolio Fit: CIHEX can be compelling for investors seeking to maintain core equity exposure but with an explicit goal of "improving the quality of the ride"-limiting drawdowns and giving confidence to stay invested as policy-driven volatility ebbs and flows.

Summary Table: CIHEX vs. Traditional Equity Exposure

In summary, markets are currently shrugging off the worst potential tariff impacts due to adaptability, expectations of negotiation, and a macro environment that supports global capital flows and company supply chain flexibility. CIHEX stands out as a dynamic, actively managed hedged equity solution that is designed to thrive in this very environment of upside opportunity with controlled risk, making it especially relevant for navigating the current landscape.