CPZ CEF: Long/Short Equity Fund, 9.8% Yield

Thesis

The Calamos Long/Short Equity & Dynamic Income Trust (CPZ) is an equity closed end fund. The vehicle is U.S. stocks centric and employs an innovative long-short strategy:

• A cornerstone long/short equity strategy—a first in the listed US closed-end fund space – and a fixed income strategy work together to access global opportunities.
• CPZ’s design intends to optimize market complexities, such as volatility, low and negative interest rates, and high equity valuations.
• CPZ seeks to provide competitive distributions and capital appreciation by engaging in equity risks more efficiently.

Source: Fund Fact Sheet

The fund has performed in line with the S&P 500 in the past year, and is down around -7%. That is disappointing for us given its long/short mandate. 2022 has been an extremely volatile year where some sectors in the market had very substantial positive outperformances (namely energy), while others underperformed (namely technology).

A long/short strategy allows a fund manager to focus on sectors which he/she believes will outperform, while being able to short the underperformers. If CPZ would have gone long energy versus short technology in 2022 it could have posted a total return performance exceeding 100% last year. Well, the fund didn’t. The vehicle is actually long certain individual names, mainly technology names, versus the S&P 500. So in essence the fund tries to monetize the spread, or marginal outperformance, of certain names versus the index. This is not a true long/short vehicle, more like a relative value play.

Some of its main long plays versus the index have not done what they should – for example the fund is long Amazon (AMZN) versus the index. We have plotted the respective two instruments in the “Performance” section below. We can see how Amazon underperformed versus the index – that translates into a negative performance. Let us put that in English – if Amazon was down -10% in 2022 but S&P 500 was down -20% then the trade would have made money (net-net this long short trade would have made +10%). However Amazon lost more than the S&P 500, hence the trade lost money.

The FAANGs have regained some ground this year but they are not out of the woods yet. With a performance in line with the index there is not much to like for this fund. This CEF is actually more of a relative value equity fund rather than a true long/short.

Analytics

AUM: $0.33 billion.

Sharpe Ratio: 0.35 (3Y).

Std. Deviation: 20.5 (3Y).

Yield: 9.8%.

Premium/Discount to NAV: -10%.

Z-Stat: -0.4.

Leverage Ratio: 41%

Holdings

The fund holds mostly equities:

We can see the vehicle having small sleeves for preferred stocks and fixed income securities. These are buckets used to generate cash-flows for the fund. The main risk here are equities:

The CEF takes advantage of its long/short mandate via a 2:1 ratio in longs versus shorts. The fund is long individual names versus an index short position:

From the table above we can see the largest long positions in the fund – namely Microsoft (MSFT), Amazon (AMZN), Google (GOOG) (GOOGL) and Visa (V). Against the longs, the fund is short the S&P 500. The below table presents the sectoral breakdown for long versus shorts:

The table should be read as the fund being long Industrials, Information Technology and Financials versus a short S&P 500 position.

Performance

The fund has performed in line with the S&P 500 in the past year:

We are comparing CPZ here with the index and a couple of other well known CEFs in the equity space. We can notice a very tight cohort spread, with most of the funds performing fairly in-line.

When looking at the long short positioning we can see how the index did versus Amazon and Microsoft:

In order for the CEF to make money Amazon and Microsoft would have needed to perform better relative to the S&P 500. They did not.

Premium / Discount to NAV

The fund has traded at substantial discounts to NAV in 2022:

As the market sold off, the vehicle moved to a discount and has exhibited one since the start of the year. We expect the discount to persist due to the CEF’s performance.

Distribution

The fund’s distribution is not covered:

While the fixed income sleeve offers constant interest payment, the equity side only generates income if the strategy performs. It has lost money in the past year, hence the utilization of return of capital to a large degree.

Conclusion

CPZ is an equity closed end fund. The vehicle has small buckets for fixed income and preferred securities, but these just serve to generate cash. The main risk here is composed of equity returns. The fund is particular because it says it employs a long/short strategy. Upon close inspection though, one finds out that it is actually a relative value play, where the fund is long certain names (such as Amazon) versus short positions in the S&P 500. That means the CEF makes money if the relative performance of the long names is better than the index. A true long/short fund can be extremely profitable if done right – just think about a fund long energy / short technology in 2022. CPZ’s performance is in line with the S&P 500 in the past year, hence nothing to write home about. The fund has a large discount which we expect to persist and a dividend distribution which is not fully supported currently. This CEF has not managed to prove itself, and there are better outright equity choices out there.