If the last year or two have taught investors anything, it’s that alts can play a big role in portfolios. As recently as 2022, bonds struggled amid significantly low interest rates, with their role as a contrast to stocks weakened. That invited markets to take a closer look at the growing and diverse world of alternatives, or alts. As part of the 2024 Market Outlook Symposium, VettaFi head of research Todd Rosenbluth discussed alts with leaders from Calamos Investments and Bitwise Asset Management.
The duo of Calamos Asset Management SVP and head of ETFs, Matt Kaufman, and Bitwise Asset Management’s CIO Matt Hougan took turns discussing the benefits of convertibles and crypto, respectively.
The Alts Landscape in Convertibles and Crypto
Kaufman reminded attendees of the panel segment that markets have included convertibles since 1977. Calamos Investments itself started out its business to some degree working in the convertibles space, he said. Convertibles are assets that begin as bonds issued from a given firm, but can convert into common stock from the same firm via an embedded call option. That helps convertibles offer what Kaufman described as a “unique combination of income, downside protection, and potential equity upside.”
“This combination really provides defensive income and enhanced alternative for direct equity investment,” Kaufman said.
Convertibles can be converted if a firm’s stock price hits a certain point. When rates were low for so long, firms didn’t have to pay too much to raise capital. Now, Calamos Investments believes firms will start looking more at convertibles for a lower cost of capital, with more investment grade borrowers looking to issue the alts asset.
“Year to date, we’ve started to see this play out,” Kaufman said. “We’ve seen investment grade borrowers selling roughly $12 billion worth of convertible bonds. That’s more than 30% of the total issuance and it’s much higher than the overall percentage of the market historically.”
Alts in ETFs: Convertibles and Crypto
Calamos Investments offers convertibles ETFs like the Calamos Convertible Equity Alternative ETF (CVRT), which just launched in October. CVRT charges a 69 basis point (bps) fee to actively invest according to a broad rules-based approach to convertibles. The strategy looks for those convertibles that are more equity sensitive, those convertibles that trade more like stocks than bonds. That active approach allows CVRT to look for outperformance with an improved risk reward profile.
Looking elsewhere in alts, Bitwise’s Matt Hougan spoke to the benefits of crypto. While crypto had struggled last year amid a “crypto winter” that entered this year, too, it has rebounded. Bitcoin has risen 150% this year, which Hougan underscored as significant given how Bitcoin had dropped 65% last year amid challenges like the FTX scandal and the downfall of Three Arrows Capital. To Hougan, crypto tends to operate in cycles, with the second and third years the most appealing.
“Those of us who have been in the industry for a while…told people that crypto winters pass and crypto is anti fragile, and it blooms again,” Hougan said. “The beautiful thing about where we are now, Todd, is that as we look ahead to 2024, that is an even brighter prospect than what we saw in 2023.”
Looking Ahead at Bitcoin ETFs
Indeed, Hougan pointed out that Bitcoin will see a “halving” in April removing $7 billion in net new supply. That happens just as a much-discussed spot Bitcoin ETF may hit the market, combining to boost Bitcoin specifically as an alts option. Hougan advised advisors to deepen their crypto education ahead of 2024 and potential spot Bitcoin ETF launches. Bitwise itself offers some crypto-linked ETFs right now like the Bitwise Crypto Industry Innovators ETF (BITQ).
With alts playing a bigger and bigger role in the investment landscape, investors should educate themselves on the variety of options. Whether that’s crypto ETFs or convertible ETFs, alts can help portfolios significantly, and may merit a look entering 2024.
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